Federal Student Loan Consolidation
A Federal Student Loan Consolidation allows you to convert your federal student loans into a single monthly payment, possibly reducing the interest you pay monthly, and potentially supplying you with access to other loan forgiveness or repayment options.
While getting a degree has excellent potential, it can sometimes end in borrowers needing several federal student loans to graduate. This will cause a complicated process of creating multiple monthly payments to student loan servicers, and a higher chance of missing payments, defaulting on loans or battling with your expenses until your loans are paid off.
Consolidation may be a great way to make repaying student loans more manageable and possibly less costly. You put together all of your student loans, remove one big consolidation loan, and use it to pay off all the others. You’re left with one payment to at least one lender monthly.
The typical student borrower receives money from federal loan programs every semester in class. It often comes from different lenders, so it’s a commonplace to owe money to 8-10 separate lenders by the time you graduate. If you continue borrowing for grad school, add another 4-6 lenders to the combination.
Each of those student loans has its maturity, rate of interest, and payment amount. Keeping track of that sort of schedule is complicated and a part of the rationale numerous students have defaulted. It’s also why student loan consolidation is such an excellent solution.
Federal loans are often consolidated within the Direct Consolidation Loan program. You put together all federal student loans into one loan that features a fixed rate of interest. That rate is gotten by taking the typical value or average of the interest rates on all federal loans and rounding it up to the closest one-eighth of a percent.
Though this method may not lower the interest you pay on federal loans, it’ll hold open all repayment and forgiveness options. Some lenders do make it possible to scale back the rate of interest by making direct payments or by qualifying for a discount by making on-time payments over an extended period of your time.
Consolidation is similar to refinancing a loan. You can consolidate all, part, or even just one of the student loans. Consolidating federal student loans may be an excellent strategy to reducing your monthly payments or stop payments, but it’s not always a good idea.
Direct consolidation loans are now the only type of federal consolidation loan. As part of the Direct Loan Consolidation Program, you can consolidate almost all types of federal student loans into a new Direct Consolidation Loan.
Non-consolidation loans include government or private loans that are not guaranteed by the federal government. Interest rates on consolidation loans are fixed.
The fixed-rate is based on the weighted average interest rate on the loan at the time of consolidation, rounded to the nearest eighth percentage point. The interest rate should not exceed 8.25% for consolidation loans before July 2013. Borrowers for a consolidation loan should not be charged an opening fee.
How to Qualify for Federal Student Loan Consolidation
The first step in determining your eligibility for Federal Student Loan Consolidation, also referred to as Direct Consolidation Loan, is to have a loan that qualifies under the U.S. Department of Education’s current guidelines. These loans are as follows.
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- PLUS loans got from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for college kids
- Federal Perkins Loans
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- FFEL Consolidation Loans and Direct
Consolidation Loans (under certain conditions)
If you’ve got private loans, or you’d wish to consolidate an immediate PLUS Loan made to your parents with a private federal student loan, you won’t be prepared to use Federal Student Loan Consolidation as a good option. However, you’ll be eligible for a Private Student Loan Consolidation, which usually offers an equivalent benefit.
In addition to having one among the above loans, you’ll also get to meet other conditions for consolidating your federal loans through the Department of Education. These requirements include:
- Consolidating a minimum of one loan or FFEL Program Loan
- Having loans in active repayment or within the grace period
- Making repayment arrangements and plans on eligible loans currently in default, or
- Agreeing to repay the Direct Consolidation Loan under one among the following:
- Income-Based Repayment (IBR) Plan
- Pay As You Earn (PAYE) Repayment Plan
- Revised Pay As You Earn (REPAYE) Repayment Plan
- Income-Contingent Repayment (ICR) Plan
Also, if you have already got an existing consolidation loan that you’re looking to consolidate with other loans, one among the loans may have to be one among the eligible federal student loans listed above.
However, FFEL Consolidation Loans could also be qualified for re-consolidation without additional eligible loans included, in certain situations.
Find out if you’ll cash in of a Federal Student Loan Consolidation for free of charge.
How a Federal Student Loan Consolidation Works
Consolidating federal student loans might not be ideal for everybody, making it essential to understand the pros and cons of debt consolidation beforehand. In some cases, other student loan repayment or student loan forgiveness programs could also be more suitable for your situation.
Here are a couple of things to think about consolidating your student loans:
PROS of Federal Student Loan Consolidation
- Conducts multiple monthly payments into one monthly payment- Consolidation means combining all of your federal loans into one. Those loans are going to be serviced by one financial institution and require one monthly payment. If you continue to send payments through the mail, this may save some money spent on stamps and envelopes, not to mention saving an entire lot of your time and aggravation.
- Helps you avoid default- Consolidating loans will allow you to vary the terms and lower your monthly payment. This could help avoid default if you’re struggling to make your payments monthly. If you default, your credit score will take a severe hit, and it remains on your credit report for seven years.
- Lower payments- Consolidation offers a spread of repayment plans, most of which extend the terms of the loan from ten years to fifteen, twenty, or maybe thirty years. An extended-term loan can lower the monthly payment to a maximum amount of 50%, making it cheaper while you get into the working world. It’s also possible to get a decrease in interest rates, which will eventually reduce monthly payments.
- May offer you access to other loan repayment plan- A Federal Consolidated Loan is eligible to a variety of repayment plans, and borrowers are liberal to choose the plan that most accurately fits their situation. Borrowers can also switch repayment plans at any time. The repayment plan for Federal Consolidated Loans is as follows: Standard plan (Ten years), Extended plan (Twenty five years), Graduated plan (start low, increase every two years for between ten and twenty years) and Income-based (10-15% of your discretionary income).
- Offers fixed interest rate- If you’ve got tons of loans, you almost certainly have tons of various interest rates. A consolidated loan features a fixed rate for the lifetime of the loan. The rate of interest on a consolidated loan is predicated on the typical value or average of the interest rates on all the loans being consolidated, rounded up to the closest one-eighth of 1.
- Deferment/forbearance options may increase- Because an immediate Consolidation Loan may be a new loan, it restarts the clock in deferment and forbearance for up to 3 years. Also, if you can’t repay a Federal Consolidation Loan because you’re trying to find employment, you’ll apply for unemployment or economic hardship deferment and delay paying for up to 3 years.
- Protects credit score- Consistent payment of student loans features a positive impact on your credit score. Missing only one payment will hurt your credit score. Paying one bill per month rather than 10-15 should lessen the prospect of negligence. Avoiding default, as mentioned above, will help protect your credit score also.
- Offers automatic debit- If the sole reason you’re consolidating is because you can’t continue with monthly payments to multiple lenders, create an automated debit from your checking account to pay the bill monthly and be through with it. Just make sure that the account is well funded monthly
CONS of Federal Student Loan Consolidation
- The interest you pay over time by extending your repayment period may increase- If you consolidate and extend the loan term, you’ll pay tons more in interest. The longer you wait to pay off the loan, the more interest you finish up paying. Also, if you’re still paying on a student loan for 20-25 years, it could hinder or maybe block opportunities to shop for a home, relocate, invest during a business or perhaps purchase a replacement automobile. Paying off a loan as quickly as you can will save time and money. It’s as simple as that.
- Rounded-up rate of interest- Direct loan consolidation adds one-eighth of 1% to the weighted average rate of interest. The new rate is decided by a weighted average of all the opposite rates, which considers the quantity owed, and adding 0.125%. If your more jumbo loans have a better rate, then the weighted average is going to be a touch above an easy average.
- You may lose any benefits related to your current loans- Also, you’ll lose benefits on other programs. For example, Perkins Loans, if the Perkins loan is part of a Federal Direct Consolidation Loan. Ensure that you read all the terms and conditions of your loan before consolidating. Some lenders give decreased interest rates or principal reductions if borrowers meet certain requirements. Those benefits will eventually be lost when your student loans are consolidated.
- You may lose the “grace” period- Borrowers typically get a six-month window before having to start out repaying student loans. That ends once you consolidate your loans. You sometimes start paying two months after your loan consolidation is approved.
- You will restart any progress you’ve made toward student loan forgiveness programs- If you’ve got made payments toward Public Service Loan Forgiveness, consolidating your loans will restart the clock in qualifying.
For many, two of the best benefits of applying for a Federal Student Loan Consolidation is to have a single monthly student loan payment and also a fixed rate for the lifetime of the loan.
Your fixed rate is decided by weighing the average interest rate being applied to your existing loans that are eligible for consolidation, then rounding this rate up to the closest one-eighth of 1 percent. Please note, there’s no rate of interest cap on a Direct Consolidation Loan.
If you’re approved for a Federal Student Loan Consolidation, your monthly payments will begin within 60 days of your loans being purchased by the Department of Education. However, if you’re still within the grace period for any loans being consolidated, you’ll be ready to delay making payments until the grace period has ended by speaking with one among our student loan specialists.
Should You Consolidate Student Loans?
If you’ve got missed payments because you struggle to maintain multiple loan servicers and multiple repayment dates, consolidation or refinancing may be a valid choice. Making one payment monthly rather than many payments makes life simpler.
You can undergo the loan Consolidation program because it allows you to keep the door open for income-based repayment options that end in lower monthly payments.
However, it’s essential to understand that if your payments are a part of qualifying for any forgiveness program, the clock restarts once you consolidate your debts. For instance, if you made three years of qualifying payments for Public Service Loan Forgiveness, then consolidate your loans, you’d lose the three years of qualifying payments, and therefore the clock would start once again.
The big issue for many borrowers is, can they afford the monthly payment? That’s what consolidation and refinancing are remedies for supplying you with a payment that doesn’t break your budget monthly.
However, if you’re making enough money right out of the gate and really dedicated to repaying your loan, the fastest, most effective method is to travel with the quality repayment program and get it wiped out in 10 years or less!
For more enquiries on Direct Consolidation Loans, you should speak with a student loan specialist by phone at