Federal Student Loan Consolidation

Applying for a federal student loan takes the hassle out of receiving a private loan with a higher rate.  Federal student loans have many advantages over private loans, like lower interest rates, and more flexible repayment options. Many different types of federal student loans are available to help students and parents pay for their education costs.

What if you need to apply for several federal student loans to cover all your costs? Chances are that your loan application can get approved. But you may be faced with heavy financial burdens while making repayments.

At some point, you may have to apply for a federal student loan consolidation to manage and lower your monthly payments.A loan consolidation can ease your financial burden and lower your bills.

Borrowers are allowed to consolidate multiple student loans into one loan. Therefore you just need to make a single monthly payment instead of multiple payments. But before you decide to consolidate your student loans, consider carefully whether loan consolidation is the best option for you. Weigh its pros and cons and then you can make your choice.

• Pros

Through combining several federal student loans into one loan, you can really simplify loan repayment with loan consolidation. In most cases, a single monthly payment after consolidation is lower than the original several multiple payments. You can save lots of money and get monthly payment relief.

• Cons

Loan consolidation can lower your monthly payments since you can have a maximum of 30 years to repay your loans. But you may have to make more payments and pay more interest with longer repayment period. Sometimes loan consolidation might double your interest expenses.  So if you’re considering consolidating your loan, make sure to compare the repayment costs of your unconsolidated loans against the cost of repaying a loan consolidation.

Another disadvantage of loan consolidation is that you may lose any borrower benefits that are offered under the original repayment plans, such as principal rebates, interest rate discounts and loan cancellation benefits. With these benefits, the cost of repaying your loans can be reduced significantly. But if you choose to consolidate, you will lose those benefits.

If you’ve studied the pros & cons and determined to submit your application, you have two options of consolidation. The U.S. Department of Education offers two consolidation options for certain borrowers.

Check to see whether you’re eligible for a loan consolidation.

Traditional Direct Consolidation Loans

Most federal student loans are eligible for a Traditional Direct Consolidation Loan, such as Direct and FFEL Stafford Loans, Direct and FFEL PLUS Loans and Federal Perkins Loans etc. To be eligible for a Traditional Direct Consolidation loan, borrowers must have at least one Direct Loan or FFEL that is in repayment or in the grace period. Typically, you’re allowed to consolidate after you graduate, leave school or drop below half-time enrollment.

But if you’re in default, there’re several requirements if you want to consolidate. Before you consolidate a defaulted loan, you must speak with your current loan provider and make satisfactory repayment arrangements on your loan. Or you can choose certain repayment plans for your new Direct Consolidation Loan. You must repay your loan either under the Income Contingent Repayment Plan or the Income Based Repayment Plan.

A Traditional Direct Consolidation Loan has a fixed interest rate during the entire life of your loan. The rate depends on the weighted average of your original interest rates. But the APR will never exceed 8.25%.

Special Direct Consolidation Loans

This is a short-term consolidation opportunity from January to June 30, 2012. Special Direct Consolidation Loans allow borrowers to get all of their federal loans into one bill and one payment. Thus borrowers can manage their debt easily. Special Direct Consolidation Loans are specially designed for individuals with at least one loan served by the Department of Education and one commercially-held FFEL loan.

To determine if you should consolidate your loans into a Special Direct Consolidation Loan, you need to assess your student loan conditions. In addition, you can consider the benefits if you choose to consolidate.

• Interest rate reduction: You can receive an interest rate reduction as a repayment incentive. The 0.25% interest rate reduction only applies to your commercially-held FFEL loans. Just like a Traditional Direct Consolidation Loan, the rate for a Special Direct Consolidation Loan will be fixed for the life of the loan.

• Eligibility for loan forgiveness under the PSLF Program: Once you consolidate your commercially-held FFEL loans into a Special Direct Consolidation Loan, your Direct Loans will qualify for the PSLF Program as long as you meet some extra requirements. And as result you may be eligible for forgiveness of your remaining balance of your loan. To qualify for loan forgiveness, you must be in full employment in public service departments and have made 120 payments.