Understanding Federal Student Loan Consolidation
Federal student loan consolidation can be a valuable tool for simplifying your loan repayment. Learn how to start taking control of your student debt.
Managing multiple federal student loans can be challenging, especially if you are a recent graduate on an entry-level salary. Federal student loan consolidation offers a practical solution by combining these loans into one. Consider consolidating your federal student loans if you're looking for repayment relief.
Federal Loans Eligible for Consolidation:
- Direct subsidized
- Direct unsubsidized
- Subsidized Federal Stafford
- Unsubsidized Federal Stafford
- Direct PLUS
- Federal Perkins
- Federal Nursing
- PLUS loans from FEEL Program
- Health Education Assistance
- Supplemental Loans for Students
How does the process work?
The federal government pays off your student loans by replacing them with a direct consolidation loan.
This loan will come with a new interest rate, which is a weighted average of your loans' rates. Assume you have two loans. The first is for $10,000 and has a 4 percent rate and the second is a $5,000 loan with a 6 percent interest rate. A new consolidated loan would carry a $15,000 balance and 4.7 percent interest rate.
Given the nature of consolidation, it's important to realize it won't always result in a lower interest rate. In fact, this new rate may be higher than before you consolidated. The good news is this rate is fixed, and you only have one loan to handle.
To get started on the process, you'll want to head over to studentaid.gov to complete an application and promissory note.
Tip: Only federal student loans are eligible for consolidation, whereas private loans can be refinanced.
Why should I consolidate?
As you've seen during repayment, you're not actually dealing with the federal government. Instead, you work with a loan servicer – a company that handles billing.
Consolidation entails turning these loans into one, so you only have to worry about a single monthly payment. Reducing your number of monthly bills can provide relief while also making it easier to track your repayment progress and stay organized.
Your income also plays a role in the decision to consolidate. According to the Department of Education, you may be eligible for an income-driven repayment plan, which could help lower monthly payments. But as you earn a higher income, payments will also increase.
"Reducing your number of monthly bills can provide relief."
Be Aware
Consolidation is not for everyone. First, you may forgo certain benefits if you choose to consolidate.
Pick and choose which ones to consolidate instead of combining all of your federal loans. You'll still be eligible for certain forgiveness benefits by doing so.
Giving yourself extra time to pay off loans is always helpful but be prepared to spend more on interest. You can always pay more than the minimum monthly amount to balance out this drawback.
Finally, consolidation is different from refinancing. Federal loans can't be refinanced through the financial aid system. To refinance, you'll need to work with a private lender but that would make you ineligible for income-driven repayment plans.
If you're looking for some immediate relief paying back your student loans, consider consolidating them. You're able to combine most of them into a single payment while giving yourself extra time to boost your annual income.
No one enjoys paying back student debt, but you can lessen the burden through consolidation.
