A federal consolidation loan, also called a Federal Direct Consolidation Loan is a loan given by the federal government that can be used to consolidate several federal student loans into one larger loan, often with lower monthly payment and lower interest rate. Read on to learn more about federal consolidation loans, including the benefits and drawbacks of the loan, common terms, and qualification standards.
Federal Direct Consolidation Loans may be a good option for you if you have several Federal Direct student loans and would like to streamline your finances by combining them into one loan. There is no application fee associated with a federal consolidation loan. In some cases, you can lower your monthly payment with a consolidation loan by extending the term of your loan up to 30 years. You can also switch loans with variable interest rates, which can change over time, to a fixed interest loan that will remain the same until you pay off the loan.
One thing to keep in mind before consolidating your loans is that by extending the term of the loan, you may be paying more over the life of the loan. In addition, if there are benefits associated with your original loan, like a discounted interest rate or the eligibility for loan cancellation in certain professions, you may lose these if you consolidate. Your loan officer can help explain the benefits and drawbacks of consolidating based on your individual situation.
Most types of federal loans can be consolidated, provided you are not in default on your loans; however, it is not possible to consolidate private student loans through the federal consolidation program.
Qualifications, interest rates, and repayment terms all vary based on your individual situation. With the standard repayment plan, you'll pay a fixed monthly rate for up to 10 years. A graduated repayment plan allows you to start with smaller payments that increase every two years for the life of the loan for up to ten years. An extended repayment plan can be fixed or graduated and lasts up to 25 years. An income-based repayment plan, of which there are several different varieties, is based on a percentage of your income.
To get started with the federal consolidation process, the first step is to visit StudentLoans.gov. While your consolidation loan is in consideration, you must continue making payments on the original loans. After the funds for the consolidation loans are disbursed, repayment typically begins after a 60-day grace period.
