The Pros And Cons Of Goverment Student Loan Consolidation
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
goverment student loan consolidation.
For starters consolidation allows you to simplify the repayment
process by combining several types of federal education loans
into one goverment 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 goverment student loan consolidation secures a
student’s interest rate. A fixed loan program means that students
can obtain a goverment 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 goverment student
consolidation loan is created.
Both of these programs simplify loan repayment by combining
several types of Federal education loans into one new goverment
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 goverment student loan consolidation.
And, the interest rate on the goverment student loan
consolidation may be significantly lower than one or more of your
underlying loans. Further, the monthly amount on a goverment
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 goverment student loan
consolidation so you won’t lose your interest subsidy on the
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
goverment student consolidation loan and make only one monthly
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
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 govenment 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
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
goverment 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 goverment student loan consolidation.
Once finalized, goverment 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
goverment student loan consolidation options before you apply.
For more details on goverment student loan consolidation, contact
your loan holder(s).