Your college or university days may be
behind you but if you received federal student loans from the US
Department of Education (ED) along the way you now have to deal with
paying them back. To avoid repayment problems it’s important to learn
how to manage your student loan debt. One of the best ways is a federal government
student loan consolidation.
For starters consolidation allows you
to simplify the repayment process by combining several types of federal
education loans into one government student loan so
you make just one payment a month. The benefit to this is that your new
monthly payment may even be lower than what you’re currently paying.
Typically student loans are paid over a
period of time between 15 and 30 years. The interest that accompanies
these students loans is variable. The downside to this is that with a long
term plan, in years 15 to 30 you may end up having to pay significantly
higher rates of interest than you did in years one to 15 since interest
rates traditionally rise over time.
federal government student loan
consolidation secures a student’s interest rate. A fixed loan
program means that students can obtain a loan
consolidation at an excellent rate. For students with high debt, this
fixed interest rate loan can literally save thousands of dollars in
interest payments over the life of the repayment period.
The Higher Education Act
for a loan consolidation program under both the Federal Family Education
Loan (FFEL) Programs and the Direct Loan Program. Under these programs, a
borrower’s loans are paid off and a new government student
consolidation loan is created.
Both of these programs simplify loan
repayment by combining several types of Federal education loans into one
new loan product. Please note that
even if your loans have different terms and repayment schedules or may
have been by different lenders chances are good they are still eligible
for a government student loan consolidation.
And, the interest rate on the
loan consolidation may be significantly lower than one or more
of your underlying loans. Further, the monthly amount on a
student loan consolidation is usually lower as the amount of time to
repay may be extended beyond the terms of your separate loans. The bottom
line is these features should result in a more manageable student loan
debt. Additionally borrowers who opt for government student loan
consolidation are less prone to default.
- You can get
a direct consolidation loan, available from ED, or a Federal (FFEL)
Consolidation Loan, available from participating FFEL lenders. Under
either program, the loan holder pays off the existing loans and makes
one consolidation loan to replace them. If you have subsidized and
unsubsidized loans, they’ll be grouped accordingly when you
initialize your government student loan consolidation so you
won’t lose your interest subsidy on the subsidized loans.
There are three categories of direct consolidation loans: Direct
Subsidized Consolidation Loans, Direct Unsubsidized Consolidation
Loans, and Direct PLUS Consolidation Loans. If you have loans from
more than one category, you still have only one direct government
student consolidation loan and make only one monthly payment.
Under the FFEL Program, you can receive a subsidized and/or an
unsubsidized FFEL Consolidation Loan, depending on the types of loans
you're consolidating. (FFEL PLUS Consolidation Loans are included
under the Unsubsidized FFEL Consolidation Loan category.)
Both FFEL and Direct Consolidation
Loans have the same interest rate, which is a fixed rate set according to
a formula established by law. The rate is the weighted average rate of the
current rates charged on the loans being consolidated, rounded up to the
nearest one-eighth of a percent. This means the rate you'll pay won’t be
more than one-eighth of a percent more than the effective rate on your
individual loans. The rate is fixed for the life of the federal government
student loan consolidation.
We’ve looked at the pros now lets
look at the cons. Although consolidation can simplify loan repayment and
might lower your monthly payment, you should carefully consider whether
you want to consolidate all your loans. For example, you might lose some
discharge (cancellation) benefits if you include a Federal Perkins Loan in
a FFEL Consolidation Loan or Direct Consolidation Loan. If that’s the
case, you might want to consolidate only your FFELs or only your Direct
Loans and not your Federal Perkins Loan(s).
You also wouldn’t want to lose any
borrower benefits offered under your existing non-consolidated loans, such
as interest rate discounts or principal rebates, which can significantly
reduce the cost of repaying your loans.
Further, even though you can have a
longer period of time to repay your
consolidation loan than you do for the individual student loans you’re
repaying, but this also means you’ll pay more interest over time.
In some cases, consolidation can
double total interest expense. If monthly payment relief isn’t a top
priority, you should compare the cost of repaying your unconsolidated
loans against the cost of repaying a consolidated loan.
Once finalized, federal government
student loan consolidation can’t be undone. Bear in mind the loans
that were consolidated have been paid off and no longer exist.
The bottom line is that it’s best
to take the time to study your consolidation
options before you apply.
For more details on
student loan consolidation, contact your loan holder(s).
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