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Federal Student Loan Consolidation: Factors to Consider

by

Mary D Wise

There is plenty of fuss being made of the miracle of loan consolidation, and how it can vastly improve the financial situation of students who might otherwise be facing huge debts. But not every college-goer can qualify for the same program. For example, federal student loan consolidation programs are different.

There are several reasons why this is the case, but it can be generally explained by the fact that federal and private loans are very different. And while it is not impossible to mixed both loan types in one consolidation program, that is considered an unwise move. Clearing college debts should be a prudent move, rather than a desperate one as there are terms to secure too. The weight of financial pressure created by student loans can be huge, especially when numerous loans are taken on over the three or four years that a student is at college. But taking a mature look at the best strategy to clearing them is better than snatching at the first deal that comes along. Federal Vs Private Loans The reason why some caution should be taken when looking at federal student loan consolidation is that the terms that federal and private loans typically have are very different. There are genuine advantages to getting federal loans, with lower interest rates and more flexible repayment structures the two most obvious. A federal loan is provided by the federal government, with the Stafford and Perkins loan programs amongst the most common. Each state offers other specific loan programs too, but ultimately they all boast lower interest rates and a lengthy period of grace on repayments. Usually the process of clearing college debts begins after graduation. In contrast, student loans from private lenders come at higher interest rates and often less accommodating repayment terms. While some may offer a period of grace, the consequence is to have a major debt at graduation and high repayments. However, there are interest only options available too. Losing Federal Benefits Crucially, however, the likely consequence of agreeing a federal student loan consolidation program on the same grounds as a private consolidation loan is to lose the benefits that the federal loans originally boast. This can prove to be counter productive, rather than helpful. For example, is a federal loan for $10,000 is available at low interest and a period of grace lasting until graduation, a move to buy it out with a privately granted consolidation loan will likely result in the interest being increased and a transfer to a repayment schedule with private loan terms. So, clearing college debts in this way translates to heightened financial pressure. This is because instead of waiting until graduation to begin repayments on a student loan at $300 per month, the private lender will now want payments of $250 per month straight away over the next 5 years. The Federal Consolidation Option So, what federal student loan consolidation options are there? Well, it is possible to sign up to a consolidation program with a lender that specializes in federal loans. The terms are designed to mirror the benefits that such loans typically have by offering a structure that is not a million miles from the original loans. This effectively means that federal loans are bought out, but the repayments are over a longer period of time (perhaps 30 years) and at a fixed interest rate to ensure the process of clearing college debts involves the lowest possible monthly repayments – in some cases 50% lower than initial terms. This is a much more constructive method of taking control of any government supported student loans.

Mary Wise is a certified loan consultant who helps people get approved for

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Federal Student Loan Consolidation: Factors to Consider