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Federal Government Student Loan Consolidation - The pros and Cons

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 federal 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 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 federal government student loan consolidation secures a student’s interest rate. A fixed loan program means that students can obtain a 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  loan 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 loan consolidation may be significantly lower than one or more of your underlying loans. Further, the monthly amount on a 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 government 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 federal 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, even though yo
u can have a longer period of time to repay your consolidation loan 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 consolidated loan.

Once finalized, federal 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 consolidation options before you apply.

For more details on government student loan consolidation, contact your loan holder(s).  

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