Government Student Loan Consolidation - Pros & Cons
The Pros And Cons Of Government Student Loan Consolidation
Your college or university days may be behind you but if you
received federal student loans from the US Department of
Education (ED) along the way you now have to deal with paying
them back. To avoid repayment problems it's important to learn
how to manage your student loan debt. One of the best ways is a
government student loan consolidation.
For starters consolidation allows you to simplify the repayment
process by combining several types of federal education loans
into one government student loan consolidation so you make just
one payment a month. The benefit to this is that your new
monthly payment may even be lower than what you're currently
Typically student loans are paid over a period of time between
15 and 30 years. The interest that accompanies these students
loans is variable. The downside to this is that with a long term
plan, in years 15 to 30 you may end up having to pay
significantly higher rates of interest than you did in years one
to 15 since interest rates traditionally rise over time.
However, a government student loan consolidation secures a
student's interest rate. A fixed loan program means that
students can obtain a government student loan consolidation at
an excellent rate. For students with high debt, this fixed
interest rate loan can literally save thousands of dollars in
interest payments over the life of the repayment period.
The Higher Education Act (HEA) provides for a loan consolidation
program under both the Federal Family Education Loan (FFEL)
Programs and the Direct Loan Program. Under these programs, a
borrower's loans are paid off and a new government student
consolidation loan is created.
Both of these programs simplify loan repayment by combining
several types of Federal education loans into one new government
student loan consolidation product. Please note that even if
your loans have different terms and repayment schedules or may
have been by different lenders chances are good they are still
eligible for a government student loan consolidation.
And, the interest rate on the government student loan
consolidation may be significantly lower than one or more of
your underlying loans. Further, the monthly amount on a
government student loan consolidation is usually lower as the
amount of time to repay may be extended beyond the terms of your
separate loans. The bottom line is these features should result
in a more manageable student loan debt. Additionally borrowers
who opt for goverment student loan consolidation are less prone
You can get a direct consolidation loan, available from ED, or a
Federal (FFEL) Consolidation Loan, available from participating
FFEL lenders. Under either program, the loan holder pays off the
existing loans and makes one consolidation loan to replace them.
If you have subsidized and unsubsidized loans, they'll be
grouped accordingly when you initialize your government student
loan consolidation so you won't lose your interest subsidy on
the subsidized loans.
There are three categories of direct consolidation loans: Direct
Subsidized Consolidation Loans, Direct Unsubsidized
Consolidation Loans, and Direct PLUS Consolidation Loans. If you
have loans from more than one category, you still have only one
direct government student consolidation loan and make only one
Under the FFEL Program, you can receive a subsidized and/or an
unsubsidized FFEL Consolidation Loan, depending on the types of
loans you're consolidating. (FFEL PLUS Consolidation Loans are
included under the Unsubsidized FFEL Consolidation Loan
category.) Both FFEL and Direct Consolidation Loans have the
same interest rate, which is a fixed rate set according to a
formula established by law. The rate is the weighted average
rate of the current rates charged on the loans being
consolidated, rounded up to the nearest one-eighth of a percent.
This means the rate you'll pay won't be more than one-eighth of
a percent more than the effective rate on your individual loans.
The rate is fixed for the life of the government student loan
We've looked at the pros now lets look at the cons. Although
consolidation can simplify loan repayment and might lower your
monthly payment, you should carefully consider whether you want
to consolidate all your loans. For example, you might lose some
discharge (cancellation) benefits if you include a Federal
Perkins Loan in a FFEL Consolidation Loan or Direct
Consolidation Loan. If that's the case, you might want to
consolidate only your FFELs or only your Direct Loans and not
your Federal Perkins Loan(s).
You also wouldn't want to lose any borrower benefits offered
under your existing non-consolidated loans, such as interest
rate discounts or principal rebates, which can significantly
reduce the cost of repaying your loans.
Further, you can have a longer period of time to repay your
government student loan consolidation than you do for the
individual student loans you're repaying, but this also means
you'll pay more interest over time.
In some cases, consolidation can double total interest expense.
If monthly payment relief isn't a top priority, you should
compare the cost of repaying your unconsolidated loans against
the cost of repaying a government student loan consolidation.
Once finalized, government student loan consolidation can't be
undone. Bear in mind the loans that were consolidated have been
paid off and no longer exist.
The bottom line is that it's best to take the time to study your
government student loan consolidation options before you apply.
For more details on government student loan consolidation,
contact your loan holder(s).