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

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 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 goverment 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, 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.

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