There's Hope for Saving on College Debt

Make it Work

The American government’s student loan program began modestly, with an investment of less than two million dollars in low-interest student loans that was mandated by the Higher Education Act of 1965. In 2012, the New York Federal Reserve estimated total student loan indebtedness at $867 billion, and most of that debt is federally guaranteed. How did this come about?

Many factors govern the increase. For instance, the amounts borrowed to fund various degree programs are not tied to the future salary ranges expected for holders of those degrees, meaning the cost of degrees is not tied to their economic value. That creates a built-in difficulty in repaying for some students. And when many students can afford college by borrowing, colleges raise their prices to capture more of the available money.

Fortunately, the loan consolidation option can help students manage large loads of student debt more effectively and avoid negative consequences like credit damage and default. By combining all your student loans into one, which is what happens in the consolidation process, you can make one monthly payment. The consolidation loan pays off your existing loans and creates an entirely new single loan, so the goal is to receive more favorable terms when that happens.

That single consolidation payment may be lower than your previous payments combined if your repayment term is longer, and consolidation can also decrease your interest rate. In general, you can consolidate your federal loans separately from your private loans.

Federal Direct Consolidation Loans

Which Federal Loans Are Eligible For Consolidation?

The U.S. Department of Education serves as the lender for the Direct Consolidation Loans, with which you can consolidate existing Direct Loans, Federal Family Education Loans (made under the old FFEL program), PLUS Loans, and sometimes Perkins Loans. Your loan status must be in one of the following four categories:

• Grace period, which begins after you leave school or fall below half-time enrollment. The grace period is usually between 6 and 9 months, during which you need not make payments.
• Repayment, meaning actively paying off your loans.
• Deferment, a period during which your normal loan payments are suspended by mutual agreement.
• Default, in which the borrower is 270 days in delinquency and has not made payments as expected for that length of time.

What Are My Direct Consolidation Loan Repayment Options?

The government is an ideal lender because its goal is to make it possible for you to repay rather than to turn a profit, which is not true of private lenders. Accordingly, the Direct Consolidation Loan offers five different sets of repayment terms, and depending on your evolving financial situation you can switch from plan to plan at will. The plans are called standard, graduated, extended, income contingent, and income-based repayment, and here’s how they work:

• The Standard plan requires a monthly payment of at least $50 for between 10 and 30 years, depending on how much you owe.
• The Graduated plan involves paying at least the amount of interest drawn by your loan each month, and your payment amount increases once every two years during the term of your loan.
• The Extended plan is an option if the amount of your Direct Consolidation Loan exceeds $30,000. You will have a maximum of 25 years to repay, and your two further choices are the fixed payment or the graduated payment, both of which work like the plans described above.
• The Income Contingent plan assigns a payment amount based on your income, the amount of your Direct Consolidation Loan, and your number of dependents. Like the Extended plan, terms range up to 25 years.
• The Income-Based Repayment plan resembles the Income Contingent plan in that your payment will depend on income, term length, and dependents, but there are two important differences. First, partial financial hardship is required to take this option, and once chosen you cannot then switch to any plan other than Standard.

Bad Credit Private Student Loan Consolidation

Unfortunately, there is no way to elude the good credit requirement altogether. Legitimate lenders do not offer private student loan consolidation products to borrowers without acceptable credit history. But if your credit is damaged and you still want to consolidate your private student loans, one possible solution is finding a creditworthy cosigner for the new loan.

If you apply for a private consolidation loan together with a borrower who has good credit, it may be possible not only to win approval for that loan but also to lower your interest rate. That result is not a given, but if your credit history has improved since you first borrowed, then you should try to leverage that improvement into a lower rate.

Every private lender has individual terms for its consolidation loans, but many give you a means of releasing your cosigner from the loan obligation after a period of successful payments. Often a cosigner is willing to help in the short term, but reluctant to commit to decades of responsibility for your loan.

You will have to shop around for the most favorable terms, asking for information like rate options (fixed or variable?), fees, or penalties for early payment. Find out how much private student loan debt you must have in order to qualify for consolidation, because that can also vary.