Out About Federal Student Loan Consolidation
If you have student
loans and are having trouble making the monthly payments, you may be eligible
for Federal student loan consolidation. First and foremost though, you should
try and get a deferment. This option is often available for Federal Perkins Loans,
subsidized FFEL Stafford Loans, and subsidized Direct Stafford Loans. Under a
deferment, the borrower doesn't have to pay any principal or interest during the
deferment period. Other loans such as unsubsidized Direct Stafford Loans, unsubsidized
FFEL Stafford Loans, and Direct PLUS Loans, the borrower doesn't have to pay any
money toward the principal, but he/she is still responsible for paying the interest
on the loan that accumulates during the deferment period. Two options for this
are available: paying the interest each month, or capitalizing the amount to when
the deferment ends, thus increasing the total loan balance.
If this option
is not available to you, then you should definitely consider student
loan consolidation. Basically, a new loan can be issued which pays off all
of your existing school loans, resulting in just one monthly payment, usually
at a lower amount than the combined total of the payments you have been making
The benefit to this approach is that it can allow someone with a
lower income to still meet the obligations of the student loan, preserving their
credit, while at the same time lowering the monthly payments to enable the borrower
to have more money each month. Also, the interest rate on the new loan can sometimes
be lower than the interest rates on the original loans, saving the student money.
Or, if the interest rates on the original Federal education loans are variable,
consolidating offers the chance to lock in a fixed interest rate, saving the borrower
lots of money if general interest rates go up in the future.
There are several
disadvantages to Federal
student loan consolidation though. For one thing, consolidation can raise
the total amount owed to the loan issuer. If the time period in which the loan
is repaid is greater than the period at which the original loans would have been
fully paid off, more interest will be charged to the borrower during the additional
years tacked on to the end of the loan, given an equal interest rate.
also could force someone to repay the loan at a higher interest rate than he/she
would have been paying on a variable rate. If the borrower consolidates variable
rate loans into a fixed rate, and then interest rates go through a long downward
trend, he/she wouldn't be able to take advantage of those low rates, due to being
locked into a fixed rate. Thus, refinancing in to a fixed rate is a gamble that
can work for or against the borrower.
So, there are many advantages and
disadvantages to Federal student loan consolidation, which can lead to saving
money or paying additional funds. A borrower should look at all the facts to determine
if this option is the right one for his/her situation.