If you have more than one federal student loan, chances are you’ve considered, or perhaps should consider, getting them consolidated.
Federal Direct Consolidated Loans are handled by the U.S. Department of Education. There can be several benefits in having your federal student loans consolidated. You would enjoy a single monthly payment; the amount you would be required to pay each month may be less; and you could have the relative freedom of choosing from or switching between a multitude of different repayment plans, as well as new and extended deferment options. If any of the loans you’d like to consolidate have a grace period of up to 9 months that you’d like to retain, you can actually use it to postpone your Direct Loan Consolidation repayment start date until nearer to the end of your preferred grace period, whereas repayment would normally begin immediately, usually within 60 days after consolidation. After your federal student loans are successfully consolidated, you might be eligible for even more federal student aid. There is no fee to apply for a federal Direct Loan Consolidation, and there are no minimum or maximum loan amount requirements to be met with the exception of the Extended Repayment Plan. There are also no prepay penalties for paying off your consolidated loan early.
Still, there are a few things to think about before consolidating your federal student loans. Consolidation effectively stretches your existing student loan debt out for a longer period of time. Although the new consolidated interest rate may be lower than the average of your existing federal student loan interest rates, it may cost you more in the long run. If you aren’t having any issues paying your existing loans as they are now or you are very close to paying them off, you might benefit more by continuing your payments just as they are and foregoing the idea of consolidation.
Also, if you have a federal student loan in default, you should look into rehabilitating it before consolidating it, otherwise it will remain on your credit report as ‘defaulted’, even after the consolidation has paid it off entirely. There are different terms and conditions for each variety of loan and among different lenders, but generally to rehabilitate a Direct or FFEL loan you must make at least 9 full payments, each being within 20 days of their due dates and of mutually agreed upon amount over a 10 month period. For a Perkins loan, you must make 12 on-time monthly payments of a mutually agreed upon amount. Your lender should be able to counsel you about your specific options.
Timing and money management are also important to consider. The consolidation process can take approximately 3 months from application to initial disbursement. During this time you’ll need to make sure that you don’t default on your loans, or if you do so, you fully understand the repercussions that will occur from them being consolidated while in defaulted status. Planning far enough ahead to be able to afford to stay on top of your individual loans until they are consolidated into one, likely lower, payment will ensure a much smoother and more fiscally successful transition.
To qualify for federal Direct Loan Consolidation, you must have at least one Direct Loan or FFEL and they cannot be listed as having an in-school status. Federal student loans that are currently in repayment, grace, deferment and default status are all eligible for consolidation. Once a federal Direct Loan Consolidation is created, it cannot be re-consolidated again unless a new loan is added. There are several Direct Consolidation Loan repayment plans available to choose from. Generally, regardless of the repayment plan you choose, the first bill for your Direct Loan Consolidation will be due within 60 days of initial disbursement and payments are due monthly. You can receive the bills by mail, however, if you choose to enroll in the Electronic Debit Account (EDA) service, you can enjoy a .25% discount on your interest rate for as long as you continue making payments using the service.
The Standard Repayment Plan has a minimum monthly payment of $50, with the term length ranging from 10 to 30 years in direct accordance to your aggregated education debt. This is generally considered the fastest and most cost efficient plan to pay off your consolidated student loan, as it encourages you to make larger payments over a shorter period of time. View full article
The Graduated Repayment Plan begins at a low amount, the minimum payment being at least the amount of loan interest accrued monthly, and gradually increases every 2 years for a repayment term length of 10 to 30 years, based on your aggregated education debt. While this plan is useful for easing into the repayment of your student loan debt consolidation, it will usually cost more than the Standard Repayment Plan since paying just the interest accrued for the first several years will not lower your actual student loan debt amount, it will simply extend the amount of time you’ll be paying on it.
The Extended Repayment Plan for which you must have a Direct Loan balance greater than $30,000 to qualify, has two available repayment options to choose from, both with a total repayment term of up to 25 years. The fixed monthly payment option requires a minimum monthly payment of at least $50 for the entirety of the repayment term.
The graduated monthly payment option has a minimum monthly payment of $50 which gradually increases every 2 years for the life of the loan repayment term. Regardless of which option you choose, this plan may be even less cost-efficient than the Graduated Repayment Plan, as the repayment term is greatly extended which in turn greatly extends the amount of interest you’ll be paying overall.
To qualify for the Income-Based Repayment Plan (IBR), you must be experiencing at least a partial financial hardship. Once this option is selected it cannot be changed to anything except the Standard Repayment Plan. Minimum monthly payment amounts are based on yearly income and household size, and also has a repayment term of up to 25 years.
To qualify for the Income Contingent Repayment plan (ICR) you do not have to be experiencing a financial hardship. However, monthly payments are still calculated using your annual gross income, aggregated loan debt amount, and household size. Once you choose or are required to choose this plan, you will need to make at least 3 consecutive monthly payments before you may be able to switch to another repayment plan.
With this plan, the minimum monthly payments you are required to make might not be enough to pay off your entire loan debt amount, including accrued interest, within the allotted 25 year term, which will result in any unpaid loan amount existing after the term being forgiven. However, the forgiven amount may be considered taxable income.
Overall, federal Direct Loan Consolidation has some definite advantages and drawbacks to consider, and is an important and permanent decision. Before filing an application, discuss your options with your lender to make sure it’s the best choice for you.