If you have multiple student loans, consolidation may be a good idea, but there are some pitfalls. The benefits are immediate lower monthly payments, and you may even be able to lower your interest rates, but you will be paying over a longer period of time. Your options depend on the type of loan and who the lender is.
Federal Direct Consolidation Loan Program
If you have federal student loans, the Federal Direct Consolidation Loan Program offers several options to make repayment easier and the executive order signed by President Obama that will go into effect in 2012 will make repayment easier still. If you have multiple federal student loans, consolidating them and stretching out the payment plan will give you more affordable monthly payments. You can use this program even if you took federal loans through a private lender, but you can not consolidate federal loans with private loans.
Consolidating federal student loans can be a smart financial move. Newly minted guidelines allow loan forgiveness for people who pay student loans for 20 years. By consolidating your loans and stretching one amount to 30 years, you may be eligible to walk away from 10 years worth of payments…a small mountain of debt.
How to Consolidate Your Federal Student Loans
Go to the website: loanconsolidation.ed.gov. You’ll find a wealth of information, including what to expect, the current interest rates, and what information you need before you apply. There’s an online application and an option to add more loans to an existing consolidation loan.
Income-Based Repayment (IBR) Plan
Most federal student consolidation loans are eligible for the IBR plan implemented by President Obama. The plan bases your monthly repayment plan on your income. This is done by making the maximum monthly payment no more than 15% of your discretionary income. Discretionary income is defined as the difference between Adjusted Gross Income and 150% of the poverty level guideline for the size of your family in the state where you live. PLUS loans are not eligible for the IBR plan.
Things to Consider
- Federal student loans have fixed rates, which can be an advantage over private loans in some cases and a disadvantage in others. You may get lower initial rates with a private loan, but wind up paying more because the rate is variable.
- By consolidating your loans, you may stretch your payments out over a longer period of time, which lowers your payments and gives you ten additional years to pay, and that means a lot more money over the long run.
- before you sign, check the interest rate and know if there are consolidation fees or late fees. Know the terms of the contract.
If you can’t pay your student loan bills, it’s important to know that they will not go away and you cannot discharge them with a bankruptcy. What’s more, they can garnish your wages. But they are highly motivated to work with you and will do all they can to make your payment easier.