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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 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
consolidation 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.
However, a government student loan
consolidation secures a student’s interest rate. A fixed loan
program means that students can obtain a government student 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 (HEA) provides 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 government student loan consolidation 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 government
student loan consolidation may be significantly lower than one or
more of your underlying loans.
Further, the monthly amount on a government
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 goverment
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 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,
you can have a longer period of time to repay your government
student loan consolidation 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 government student loan consolidation.
Once
finalized, 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
government student loan consolidation options before you apply.
For
more details on government student loan consolidation, contact
your loan holder(s). |
