Federal Student Loan Consolidation

Federal Student Loan ConsolidationIf you are wondering what a federal student loan consolidation actually does, here is a simplistic explanation.
Essentially, what consolidation does is take the borrower’s loans and combine all of them into one new loan with a single lender and a weighted interest rate. Borrowers who are feeling overwhelmed trying to keep track of many different loans with different lenders, balances, and interest rates will find this undeniably easier to manage.
There are consolidation programs for both federal and private student loans, but here we will solely discuss the process of federal student loan consolidation.  For more information relating to federal student loan consolidations, please contact us.
William D. Ford Direct Loan Consolidation Program

The Direct Loan program was created and passed by President George H. W. Bush in 1992. It was an amendment to the Reauthorization of the Higher Education Act. Even though the program has existed for the past 23 years, more recently, President Obama switched all new student loan lending over to the Direct Loan program. This occurred in 2010, and since then, the program has been much more well-known.
In fact, the Direct Loan program now has over a $1 trillion dollar balance. There has been an increase in the hundreds of billions of dollars being lent to students on an annual basis.

Benefits of Federal Student Loan Consolidation

Consolidating your federal student loans is a wonderful idea for many graduates who are feeling overwhelmed, and there are several reasons for you should consider consolidating your loans. Many borrowers who review the benefits and make an educated decision find that their financial burden is lessened.

One of the greatest benefits of federal student loan consolidation is having only one federal loan under your name with one lender and only one interest rate. This simplifies your student loans a great deal. This balance can easily be tracked on one simple monthly bill. This means that you will not have to pay multiple bills to different lenders each month and you will always be aware of your total balance, because it will be delivered to you in one statement.

Also, consolidation programs offer flexible plans that ease the stress and confusion related to repayment. You have a variety of repayment plans available to you depending on your specific needs, some of which have monthly payments as low as $0.00 per month, depending on your income and family size.
One thing to keep in mind is that this does not mean that you are deferring your payment. On the contrary, you are actually making a payment of $0.00 per month if the government is aware that your income is so low that you cannot afford to make payments.

In addition, payment plans are not concrete, like a normal loan. For example, if you are currently capable of making payments, but your income becomes lower in the future due to extenuating circumstances, you will be able to change your repayment plan and no other adjustments will be necessary. This allows you a great deal of flexibility and ensures that you do not fall into default if you become unemployed or your income decreases unexpectedly. This repayment plan allows you to receive relief if you are not able to pay for your basic necessities.

There are also various forgiveness plans available to those who have consolidated their loans. For example, a borrower who has been steadily paying back their loans for 20-25 years, any remaining balance on your federal student loans will be forgiven. Of course, this could be a very large amount, and the debt forgiveness could be significant enough to provide a lot of financial relief to the borrower and their family.

The IBR repayment plan allows interest on the subsidized portion of loans to be forgiven for the first three years. If your monthly payment is less that the interest that should be accruing, you can see your debt be forgiven.
Another benefit to consolidated loans is that borrowers who have them are also eligible for the public service loan forgiveness program. Any defaulted loans that you may have will be taken out of default once you consolidate, and you will be put back in good standing with your lender, allowing you a new start. This, combined with the flexible repayment plans, gives the borrower a second chance. It also decreases your chances of falling back into default in the future. Unless the borrower is incredibly apathetic about paying back their loans, falling back into default is very unlikely.
Interest on the loan is always exactly the same as what interest is on all of your loans. You do not need to worry about negotiating.

Downsides to Federal Student Loan Consolidation, and Reasons Not to

Federal student loan consolidation is not the best option for everyone, in spite of its many benefits. Borrowers are advised to become educated about their specific circumstances, and to take action only after they have reviewed the options available to them. One of the main reasons not to consolidate is that, in some cases, it could significantly extend the life of your loan. If you are able to repay your loan at the present time and would like to get it paid off in a short amount of time, you should probably reconsider consolidating. In addition, once your loans have been consolidated, they are converted into Direct Loans. You will lose the benefits you had with your loans previously, if there were any.

Repayment Plans

The borrower can choose from several different repayment plans available to them. This helps them take advantage of the new consolidated loan. The Income Based Repayment and Pay As You Earn  plans are used the most often for borrowers with significant financial difficulties.

Weighted Average Interest Rates

The Direct Loan Consolidation program uses a weighted average interest rate to calculate your new interest rate in the consolidation. It is then rounded up to the nearest one-eighth of 1%. This means  that the average weight, or balance, of your loans, is calculated to ensure that you get the fairest interest rate possible.
For example, a hypothetical borrower with a balance of $100,000 on their federal student loans splits their loans into two different loans.  One loan is $25,000 at 6.5% interest, while the other is $75,000 at 3.5% interest. Because the loan with a $25k balance makes up 25% of the borrower’s balance, they would multiple 25% x 6.5% = 1.625%.  The remaining $75k balance, which makes up 75% of the total balance, would be calculated in this way: 75% x 3.5% = 2.625%.  The Department of Education then combines those two results to establish the weighted average interest rate. In this case, it would be 1.625% + 2.625% = 4.25%.
In this example, the borrower had two interest rates, which were then consolidated into one single interest rate, and the balance of the loan was taken into consideration when calculating the new and fair weighted average interest rate.

The Length of Time Necessary to Consolidate

How long it takes to complete the federal student loan consolidation process depends on a few different things. Mostly, it depends on the borrower and the federal servicer. Once the borrower has signed all the necessary paperwork and submitted their request for consolidation to the lender, it will generally take between 30 and 60 days for the loans to become consolidate and paid off.

Loans That Are Eligible For Consolidation

Unfortunately, only those with federal student loans are eligible for this consolidation. Borrowers who took out private loans are not eligible at all. If you have any of the following loan types, you might consider this as an option:

  • Direct Subsidized
  • Direct Unsubsidized
  • Federal Perkins Loans
  • Plus Loans
  • Stafford Unsubsidized
  • Stafford Subsidized
  • Supplemental Loans for Students (SLS)
  • Federal Nursing Loans
  • Health Education Assistance Loans
  • FFEL Loans (must be consolidated with another loan, or applying for PSLF)

When Can I Apply For Federal Student Loan Consolidation?

Not everyone can apply at all times. If you are still in school full-time, you can’t consolidate your loans. In order to be eligible for a consolidation, you need to have graduated from school, left school, or dropped below six credits per semester. It is free to apply for federal student loan consolidation if you are completing the process on your own. However, many borrowers require assistance and prefer to have representation while applying for consolidation because they are uncertain that they will be able to get all the benefits available to them without the help of a professional. If this is the case for you, and you would like to hire someone to assist you, please give us a call at (800) 784-1755.