Information on Federal Consolidation Choices

How Direct Consolidation Loans Can Help

The federal government is the nation’s primary provider of both student loans and the consolidation loans used to combine existing student loans into one large loan. Since it lacks any profit motive, both original loans and consolidation loans from the government usually have lower interest rates and easier payment terms than loans found in the private market. Rather, its goal is to put as many students through school as affordably as possible, and that includes recommending consolidation loans when appropriate.

Do You Need A Direct Consolidation Loan?

The U. S. Department of Education (USDOE) provides clear, straightforward information on its consolidation loan features, suggesting that anyone considering consolidation first make a thorough review of existing federal loans. If you’re not sure which bank services your loans, you can check an online database called the National Student Loan Data System and find all the information about your loans that’s been forwarded to the USDOE by your school and whatever companies guarantee and service your loans.

Your first step will be to determine the amount of all your monthly federal loan payments added together. Then multiply that by the number of months until your payoff date to find the total cost of your loans. Do not include private loans, because they cannot be included in federal consolidation.

What Loans Can Be Included In A Direct Consolidation Loan?

Here’s a list of eligible loans:

• Direct Subsidized and Unsubsidized Loans
• Direct PLUS Loans
• Perkins Loans
• Federal Nursing Loans,

and here are the older types of loans that are also included:

• Stafford Loans, both Subsidized and Unsubsidized
• Federal Family Education Loan (FFEL) Program PLUS Loans
• Supplemental Loans for Students (in this case, the proper name of a specific type of federal loan), and
• Health Education Assistance Loans.

Even some existing consolidation loans can be consolidated again. Note: A student’s consolidation cannot include a PLUS loan taken out by a parent to pay for that student’s education.

Your second step is to estimate what your monthly payment and total loan cost would be if you consolidated those loans, then compare it to the current amounts. The USDOE has set up an online calculator for this purpose. To confirm the results of your calculation, you can contact the USDOE directly to compare your numbers to the consolidation loan terms the Direct Loan Consolidation Center would offer you.

Am I Eligible For A Direct Consolidation Loan?

Determining your eligibility is step three, and there are four primary requirements for taking out a Direct Consolidation Loan:

• You must have at least one existing loan through the Direct or FFEL programs.
• One of your eligible loans must be in either grace or repayment status.
• If you want to include a defaulted loan, you must make acceptable arrangements to repay it with the company currently servicing the loan. Alternately, you must agree to one of these two repayment plans for your Direct Consolidation Loan: Income-Contingent or Income-Based, about which you can find details here.
• Rules for including an existing consolidation loan in a new consolidation are probably the most complex aspect of consolidation. Some FFEL Consolidation Loans may be reconsolidated on their own, but usually you must include a new Direct or FFEL loan in the group to be consolidated.

Direct Consolidation Loan Costs

There is no fee to apply, and no prepayment charge for a Direct Consolidation Loan. The loan will have a fixed interest rate, calculated in an interesting way: take the weighted average of the rates on your existing loans and round that number up to the nearest eighth of a percent. In this case, the weight is assigned to each existing loan’s interest rate in the same proportion as the amount of the existing loan to your total existing debt.

For example, if you have a $5,000 loan at 5% and a $15,000 loan at 6%, your total indebtedness is $20,000. The weight of the first loan’s 5% is 25% compared to 75% for the second loan’s 6%, and the weighted average of those two rates is 5.75%. The rate of the new Direct Consolidation Loan is capped at 8.25%.

Repaying Your Direct Consolidation Loan

Your loan servicer will tell you when to start repaying your Direct Consolidation Loan, and repayment must begin within sixty days. Possible lifespans for such a loan vary between ten and thirty years, depending on three factors: the amount of your other debts, the amount of your consolidation loan, and your repayment plan.

There are three possible repayment plans for a Direct Consolidation Loan:

• The Income-Based Repayment (IBR) plan applies to consolidation loans that do not include Direct or FFEL PLUS loans made to parents.
• The Pay As You Earn plan, which started in December 2012, is offered for the same loans as the IBR plan, but usually brings a lower monthly payment amount.
• The Income-Contingent plan can be used for any Direct Consolidation Loan.