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How to Consolidate Student Loans

Are you considering student loan consolidation as a solution to your student debts challenge? You need to first find out whether it will help you achieve your objective. What is student loan consolidation? I will define this with explanation. As you know that it is possible for a student to obtain student loans from different loan servicers before he finally graduates from school. Let’s assumes that you accumulated total debts of $34,000 from eight different loan servicers in order to pay for your tuition fees and other expenses while at college. The implication of this is that, you will need to be making eight different payments to eight different lending institutions every month. To worsen the situation, all the loans may be having different due dates. This can be too stressful and keeping tracks of these payments every month can cause a lot of distractions. Student loan consolidation helps you combine one or more of these loans into one so that you don’t need to be making different payments at the end of the month in order to service the loans. Instead, you will only need to make just a single monthly payment to pay for the student loans you are consolidating.

How does student loan consolidation work?

Government offers Direct Consolidation Loans through U.S Department of Education. If you want to consolidate student loans, you will need to obtain and complete free Federal Direct Consolidation Loans Application and Promissory Form. This form is available through Studentloans.gov.  You can either complete the form online or download the paper copy. You are at the liberty to select a loan servicer.  If you have different federal student loans, you will need to select the ones you want to consolidate. It is not compulsory that you must select all your federal student loans. However, it has to be noted that you can only consolidate federal student loans under Direct Consolidation Loans, This means that you will not be able to include private student loans in the scheme. You will need to agree to repay the new consolidation loan. The interest of the new Direct Consolidation Loan will be calculated as the weighted average of interest rates of the student loans you are consolidating. It is the responsibility of the loan servicer to pay off your previous loans you want to consolidate and keep you updated when the loans are paid off. It is better you keep paying your loans until your servicer notifies you that the loans you are consolidating have been paid. This will help you avoid unnecessary accumulation of interest. However, if the loans are in forbearance, determent or grace period, payments will not be a concern to you. Nevertheless, if you need any clarification about your new direct consolidation loan, you will need to follow up with loan servicer you selected for the consolidation.

If you are looking for a way to lower your interest rates, Direct Consolidation Loans may not be proper for you. Instead of lowering your interest rate, it will round up the weight average rates of your previous student loans to the nearest one eight of one per cent. If your Direct Consolidation Loan is approved, this means that your previous loans that you are consolidating will be paid off while a new one with new repayment term will replace them. If you have any unpaid interest on the previous loans, this will be added to your new loan. Furthermore, you will not be able to carry any progress you have made so far toward loan forgiveness program into the new consolidation loan you are getting. You will not be able to consolidate parent PLUS loan with your other types of federal student loans. Parent PLUS loans are not eligible for income-based repayment method. The best option might be for you to consolidate your parent PLUS loans separately if you will like to opt for income-based repayment method.

What loans can you consolidate under Direct Consolidation Loans?

The under-listed federal student loans can be consolidated.

• Direct Subsidized and Unsubsidized Loans
• Direct PLUS Loans
• Federal Perkins Loans
• Subsidized and Unsubsidized Federal Stafford Loans
• PLUS loans from FFEL Program
• Supplemental Loans for Students
• Nurse Faculty Loans
• Nursing Student Loans
• Loans for Disadvantaged Students
• Health Education Assistance Loans
• Health Professions Student Loans
• FFEL Consolidation Loans and Direct Consolidation Loans

Please note that you cannot consolidate student loans while you are still in school. However, you will be able to consolidate your loans if you drop below half-time enrolment. You may not be allowed to consolidate student loans that are in default except there are satisfactory repayment arrangements in place. Certain conditions may also apply to FFEL Consolidation Loans and Direct Consolidation Loans

Read Also: Student Loans: How to Minimize Your Student Debts

Essential Features of Direct Consolidation Loans

• Availability: Direct Consolidation Loans are only available for people that want to consolidate federal student loans. That is, you will not be able to consolidate private student loans with federal student loans. If you have private student loans that you like to consolidate, you can only do that with private lending institutions. Some private lending institutions can even consolidate both private student loans with federal student loans for you.
• Fixed interest rate: Student loan consolidation under direct loan consolidation enjoys fixed interest rate. This means you are not affected by any possible increase in student loans interest rates as in the case of variable interest rates under private student loans. This can help you plan your monthly repayment.
• Single monthly payment: Instead of paying different loan servicers with different due dates every month, you only need to make a single payment every month. This saves you some stress as you don’t need to keep reminding different dates. You will be able to concentrate more on those things that are important to you. Also, the probability of missing payments is less
• Freedom to choose loan servicer: You are free to choose your loan servicer. You can easily get recommendations from satisfied students about loan servicers with good track of records.
• No credit check: Government backed student loan consolidation does not require credit check. Therefore, you have a greater chance of meeting the eligibility requirements for student loan consolidation.
• Prepayment: You can prepay for direct consolidation loan without you being penalized. This will save you interest payment. Some private loans institutions will charge you prepayment penalty if you choose to pay off your loan before the agreed period.
• Different repayment plans: With Direct Consolidation Loans, you have access to different repayment plans. That means you can choose the one that best suits you. This reduces the chance of falling behind in your repayment. It is advisable that you contact your loan servicer so that you can get a professional advice on which plan will best fit your situation. The different repayment plan available under Direct Consolidation Loans are as listed below:
  • Standard repayment plan: This is considered the traditional approach. Everybody is on this plan by default except you choose otherwise. This repayment plan affords you to less interest over time when compared to other repayment plans. The minimum monthly repayment you can make under standard repayment plan is a fixed amount of fifty dollars. Your payment duration can vary from ten to thirty years. Your total student loans will be considered in determining your repayment period. This total indebtedness is not limited to the student loans that you are consolidating. Other federal student loans which you are not consolidating and other private student loans will be taken into consideration. However, there is a maximum cap on the total other student loans which can be considered in this instance. It should not be more than the total debt amount you want to consolidate. You will be asked to list the other student loans that you have which you are not consolidating in your application. They will use this to determine your total indebtedness for the purpose of determining  your repayment period. Below is the table showing repayment period under standard repayment plan.

Total Student Loans	Repayment period
Less than $7,500	10 years
$7,5000 – $9,999	12 years
$10,000 – $19,999	15 years
$20,000 – $39,999	20 years
$40,000 – $59,999	25 years
$60, 000 and above	30 years

• Graduated repayment plan: By the time you are still in school, it is possible that you expect that you are going to get a very fat salary paying job. Unfortunately, you may not be able to secure such job immediately. For this reason, you might not mind accepting any job offer that comes your way under such circumstance. At least, the job can help you pay your bills while you gain relevant practical experience at the same time. Therefore, you may chose a plan that will allow you begin with smaller payment amounts in the beginning of repayment. This will then increase over time as your income increases. This means that you will pay lower amount in the beginning while the payments keep increasing every two years. You are expected to finish repaying the loan within ten to thirty years period. Your monthly payment under graduated repayment plan is not expected to fall below the interest amount that accrues between your payments. Also, the monthly payments have to be structured in such a way that it won’t be more than three times greater than any other payments you are making. The main drawback of this repayment plan is that you will still need to increase your monthly payment even if your income does not increase as predicted. Your repayment period will be determined by considering your total student loans. That is, both consolidated federal student loans, the federal student loans and other private student loans that you cannot consolidate under direct consolidation loan. Just like standard repayment plan, you need to list your other student loans that you want to be included in your total indebtedness in determining your repayment period. The maximum repayment period for both standard and graduated repayment plan are the same as you can see in the table below:

Read Also: Federal Student Loans: New Rates Effective 01 July 2017

Total Student Loans	Repayment period
Less than $7,500	10 years
$7,5000 – $9,999	12 years
$10,000 – $19,999	15 years
$20,000 – $39,999	20 years
$40,000 – $59,999	25 years
$60, 000 and above	30 years

• Extended repayment plan: Under extended repayment plan, you can either make fixed or graduated monthly payments toward repaying your consolidated loan. Extended repayment plan allows up to 25 years repayment period. However, in the context of consolidated loan, some people claim that you can use the same repayment period charts as applicable under the standard and graduated repayment plans. You may like to double check with your loan servicer.
• Income-driven repayment plan: Under income-driven repayment plan, you don’t feel too stressed out as your monthly student loan repayment amount is set at the level that is affordable for you based on the level of your income and family size. There are four repayment plans under income-driven repayment plan namely Pay As You Earn Repayment Plan (PAYE Plan), Revised Pay As You Earn Repayment Plan (REPAYE Plan), Income-based Repayment Plan (IBR Plan) and Income-contingent repayment plan (ICR Plan). If you like to enrol in any of the plans, you must apply for it. The monthly payment you make under income-driven repayment plan is actually a certain percentage of your discretional income. What is discretionary income? Discretionary income is that part of your income that is left after you have paid your taxes and other essential things like foods, clothing and shelter. In this context, discretionary income is described as the difference between your income and one hundred and fifty per cent of the poverty guidelines for your family size and state of residence. In any of these four plans, your monthly payments can be reviewed upward or downward depending on your level of your income and family size. You will need to file information about your income and family size with your loan servicer every year whether there is any change or not. Your income has to be reassessed every year in order to determine your new monthly repayment amount. In a situation whereby your situation changes within the year, you may not need to wait till the end of the year when your loan servicer sends you an annual reminder before your file your updated recertification documentation. Though you are not mandated to file any change before the end of the year, it will help you if you do, in case you suddenly lose your job. You need to note that the annual recertification is very compulsory for people under income-driven repayment plan. If you fail to file your documentation on time, you may be forced out from your preferred repayment plan or compel you to make monthly payments that are not based on your income any more. The table below shows the repayment amount and the repayment period under each type of income-driven repayment plan.

Repayment Plan	Payment Amount	Payment period
PAYE Plan	Lower of 10% of discretional income and the 10 year Standard Repayment Plan amount	20 Years
REPAYE Plan	10% of discretional income	20 years for undergraduates study
		25% for graduates or professional study
IBR Plan	Lower of 10% of discretional income and the 10 year Standard Repayment Plan amount if you borrowed on or after July 1, 2014	20 years
	Lower of 15% of discretional income and the 10 year Standard Repayment Plan amount if you borrowed before July 1, 2014	25 years
ICR plan	Lower of 20% of discretionary income and fixed payment amount over 12 years (based on your income)	25 years

In case you are unable to fully pay off your loan at the end of the repayment period, your remaining balance will be forgiven. Note that if you are under any Public Service Loan Forgiveness Program, the terms stipulated in such Public Service Loan Forgiveness Program supersede the payment period stipulated under income-driven repayment plan. You will need to follow up with your loan servicer to confirm whether you meet the requirements for Pay As You Earn and Income-Based Repayment Plans as each of them has specific eligibility requirements.

Drawbacks of student loan consolidation

Student loan consolidation is not without some drawbacks. Few of these drawbacks are highlighted below:

• Increase in Interest Rate: Student loan consolidation is not an interest saving strategy. Instead, you may notice that your weighted interest rate increases a bit. Your new interest rate is the weighted average of interest rates on the student loans you want to consolidate. This is round up to the nearest one eight of one per cent of the new rate.
• More interest payment: Longer repayment period that usually characterizes student loan consolidation means that you are going to pay more interest. The longer you owe the student loan, the more interest you will have to pay. This means that you are paying more than the amount you would have paid as interest if you don’t consolidate to extend the length of the student loans.
• Loss of privileges: Student loan consolidation, if not done properly, can make you lose some privileges such as your credits toward student loans forgiveness. You may not be eligible to certain income-driven repayment plans. Also, if your student loans are in their grace period, your grace period will terminate immediately the student loan consolidation process is completed. In some federal student loans, you may not start the repayment of your indebtedness immediately after you graduate from school. You can be given a period of six to nine months after you graduate, leave school or drop below half time enrolment before you start repaying your student loans. This period is called grace period. If you don’t want to lose your grace period, you may need to wait till the time your grace period is about to expire before you apply for student loan consolidation. In like manner, if your student loans are in deferment period, such deferment will end immediately you complete the student loan consolidation process. However, if you still find it difficult to pay your consolidation loan, you may apply for new deferment but there is no guarantee that you will be granted the same deferment you were granted before the consolidation.

Read Also: Effects of Late Payment on Credit Score

Dealing with Student Loans Default

If you are involved in student loan consolidation, that will help you simplify your payments for you. You still need to ensure that you make your monthly payments on a regular basis. If you are still finding it difficult to pay, the best approach is to quickly notify your loan servicer. He may arrange a temporary deferment for you to allow you stabilize before you resume repayments. This is better than waiting for your loan to go into default. What is loan default? Default starts with delinquency, that is, failure to pay your loan on due date. If you don’t pay your student loan 90 days after it has been due, your loan provider can report you to credit bureaus. This will definitely lower your credit score. If your student remains as delinquent for up to 270 days, then your loan is already in default. Default can stay in your credit report for seven years. If you allow your student loans to enter default, you will no longer qualify for deferment or forbearance neither will you be able to choose any repayment plan. The implication of this is that, your loan becomes due immediately. Your loan servicer may decide to take you to the court and you will be responsible for all the court expenses. Your federal and state tax refund can be withheld and channelled towards the repayment of your loan. Your employer can be instructed to withhold portion of your salary and send to your loan servicer to repay your debt. This is what is called garnishment of salary. Remember some employer will like to carry out your credit check before you are employed. It may be difficult for you to get a new job. result Therefore, it is better not to allow your loan to enter into default. However, if you are reading this article and you loan is already in default, it may not be too late for you to contact your loan servicer and explain your situation. They may be able to agree to your repayment agreement.

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