Consolidating Student Loans – Things To Know

For anyone who may have multiple Federal Student Loans, consolidation can be the answer if making multiple monthly payments has become a financial hardship and does not want to default on their responsibilities. At just over $1 Trillion, student loan debt grew larger than credit card debt in 2012 and continues to climb. If you’re thinking about trying to consolidate federal loans you took out as a student, consider these:

First, make certain you are eligible. At least one of your Federal Family Education Loans, Direct Loans or Direct PLUS loans must be in deferred, grace, or repayment status. Loan cannot be consolidated if they are still in-school status.

Second, ask yourself if this is the right choice. The biggest attraction to consolidating student loans is the reduced monthly payment via the income based repayment plans. One thing that’s important to keep in mind is that your repayment term may be extended if you have already been paying on your loans for a long time.  Most of the repayment terms are decided upon the balance of your loan.

Third, take a look at the different forgiveness options you may be able to take advantage of. When you consolidate your loans into a Standard 10 year repayment, Income Based Repayment, or Income Contingent repayment, you would be eligible for Public Service Loan Forgiveness after 10 years of paying on those loans.  Another forgiveness aspect is that when you enter into the Income Based Repayment, your first three years of unpaid interest are forgiven.  What this means is that if you qualify for a zero payment for example, all that interest that you are not paying for three years is not capitalized.  In all repayment plans, when the term is finished on your loan the balance is forgiven.

Fourth, if you think being in deferment is a solution, think again.  Having your loans deferred simply puts your loans on hold.  The term is not disappearing, neither is the balance. If you qualify for an income based payment of zero, this means you do not have to pay anything, but your loan term IS diminishing.  Once the term is finished the balance on your loans are completely forgiven. If you are unemployed and do not see yourself working in the foreseeable future (stay at home mothers, those with disabilities that dont qualify for TPDD, etc) you can have a zero payment for as long as you are not working.

If you do decide that Federal Loan Consolidation is your best option, then next step is seeing what type of repayment plans you will qualify for.  Here at Student Debt Relief we offer a repayment quote calculator that will instantly give you a result to your email on how much you would have to pay monthly in the different repayment options.  The whole application process is not simple, but you’ll find it much friendlier and cheaper than trying to deal with collection agencies if you are in default. 

Once the completed application is received by the Department of Education, their loan office will verify the loan status with each loan holder. Even if all loans are in default, you still qualify to have them consolidated but must enter into the Income Based Repayment, or Income Contingent Repayment. When that is completed, the Department of Education mails a summary packet to you. If there are no errors in the loan status information, then the loan will be closed to the loan holder. You are still liable for payment on the loans until you receive the packet and respond to the Department of Education loan office. If there are no further issues, payment will then be made to the original loan holder who must close the loan and inform you in writing that this has been accomplished.

As this is being completed, a Direct Consolidation account is set up to receive payment from you on the new loan. You should receive notice on this within thirty days of the Department of Education paying off the previous loans and will have the information you’ll need on monthly payment amounts and due dates. Your initial payment will be due sixty days after the new Direct Consolidation loan account has been established.

While consolidating your loans may not be for everyone, there are many benefits that should be taken advantage of if you are able to qualify for them.