Should you consider student loan consolidation?Leave a Comment
Managing multiple student loan payments with various servicers and multiple interest rates can be exhausting. Perhaps what you actually need is a loan consolidation. The U.S. Department of Education made the important decision of allowing individuals to choose their private consolidation servicer under the Direct Consolidation Loan program.
Is loan consolidation the right choice for you?
Consolidating your loans can be a breath of fresh air for any borrower seeking convenience and ease in managing their student loans as it allows you to consolidate (combine) multiple federal education loans into one. The result is a single monthly payment instead of multiple payments.
Now let’s look at some of the federal student loan consolidation benefits you’ll be able to maintain, things to take into consideration and things you should have in order to get your consolidation loan.
Federal student loan consolidation benefits
Flexible repayment options
There are multiple repayment plans with various terms you can choose from to repay your consolidation loan. Income-Based Repayment (IBR), Pay As You Earn, and Income-Contingent Repayment (ICR) plans offer flexibility and lower payments based on your income and family size. You may also change plans any time based on eligibility requirements. To estimate your monthly payment under various options, visit the U.S. Department of Education’s Federal Direct Consolidation Loans Online Calculator.
If you want to consolidate student loans that are in a grace period, you should indicate on your application the date which grace period ends. Otherwise, your consolidation application will be processed right away and you’ll lose your grace period.
Take care of your past due loans
When you apply for consolidation, it’s possible you may also be eligible for a temporary forbearance that may bring your qualifying past due loans current.
Public Service Loan Forgiveness (PSLF) eligibility
Student consolidation loans are eligible for loan forgiveness under the PSLF program if you meet the additional program requirements. However, not all loan forgiveness programs can be maintained under a direct consolidation loan.
Things you should consider
Paying a different interest rate
A direct consolidation loan’s interest rate is based on the weighted average of the interest rates of the loans being consolidated rounded to the nearest one-eighth of 1%.
Paying more over the long term
Extending the years of repayment of a student loan, as in a car loan or a home mortgage, will increase the total amount you’ll have to pay over the loan tenure.
If any of your loans which you wish to consolidate is in a grace period, you can request to delay the processing of your consolidation loan until your grace period ends. You must enter the month and year your grace is expected to end on your application. Leaving it blank will result in your documents being processed as soon as they’re received and that will cost you your grace period. Once the consolidation loan is completed, you’ll be required to start paying back immediately.
Direct Parent PLUS loans are not eligible for combining into a consolidation loan under the Income-Based Repayment (IBR) or Pay As You Earn plans. They are eligible, however, for an Income-Contingent Repayment (ICR) plan.
Loss of federal student loan benefits
You may lose some federal student loan benefits such as eligibility for subsidized interest, deferment or loan forgiveness.
Requirements for your direct loan consolidation eligibility
1. You must have at least one federal loan under either the Federal Family Education Loan (FFEL) or Direct Loan programs.
2. You can’t consolidate your loans while you’re still in school.
3. You must have loans in grace or repayment status (including deferment, forbearance, or delinquent).
4. If you want to consolidate a defaulted loan, you must either make satisfactory repayment arrangements on the loan with your current loan servicer before you consolidate, or agree to repay your new direct consolidation loan under the Income-Based Repayment, Pay As You Earn Repayment or Income-Contingent Repayment Plan.
5. Generally, you cannot consolidate an existing consolidation loan again unless you include an additional direct Loan or FFEL Program loan in the consolidation. However, under certain circumstances, you may re-consolidate an existing FFEL consolidation loan without including any additional loans.
6. There are no application fees for a direct consolidation loan and you can prepay your loan at any time without penalty.