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Find 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 before.

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.

It 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.

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