Consolidation is like refinancing—you get a new loan, the new loan pays off your old loans, and you pay the new consolidation loan instead. Why bother? Below are some important FAQs on this subject:
Which loans can I consolidate? You can consolidate pretty much all kinds of federal student loans like Subsidized and Unsubsidized Stafford Loans, PLUS Loans, and Perkins Loans, including most federal loans in default. But be careful—defaulted Direct Consolidation Loans can't be reconsolidated, so you only get one chance to use consolidation to get out of default.
[Pick from the federal student loan smorgasbord.]
When does consolidation make sense? Consolidation might make sense if:
1. You want to combine your federal loans and make just one monthly payment.
2. You want to lock in a fixed interest rate on variable interest rate loans (those borrowed before 2006).
3. You need a way out of default.
4. You have Federal Family Education Loans, or FFEL (federal loans from a bank or private lender like Sallie Mae) and you want those federal student loans to be eligible for Public Service Loan Forgiveness (since only Direct Loans are eligible).
[Learn more about the Public Service Loan Forgiveness program.]
What are the downsides to consolidation? It's important to understand the potential disadvantages to consolidation. For instance, you'll have the option of taking longer to repay, so a consolidation loan could cost you more over time (since interest keeps adding up until you're done). If you consolidate while you are in school—currently allowed under limited circumstances—you'll lose your grace period. In addition, if you're close to paying off your loans, consolidation might not be worth the effort.
How can consolidation get me out of default? If you're in default on your student loans, you can't get new loans to go back to school, and you face severe collection procedures. Consolidation can give you a fresh start. You can consolidate defaulted student loans into a Direct Consolidation Loan and stop collections including garnishments and tax intercepts. Be aware that if you are in default, your balance will go up after you consolidate, because collection fees will be added to the loan.
Can I consolidate my private student loans into a Direct Consolidation Loan? I wish. Unfortunately, private loans are not eligible for consolidation into a Direct Consolidation Loan. And, for Pete's sake, beware of consolidating federal loans into a private consolidation loan. Federal loans have important borrower protections that you lose if you choose to consolidate federal loans with a private lender. Also, federal consolidation loans generally have lower interest rates. Only Direct Loans offer federal consolidation loans these days.
[Read the 6 advantages to federal student loans.]
How do I apply for a Direct Consolidation Loan? You can apply online for a Direct Consolidation Loan. Direct consolidation loan applications submitted online are processed more quickly than those submitted by mail. Be sure you include the right information about the loans you are consolidating. You'll need to know the balances of all your loans to complete the application. If you make mistakes on the application, it will probably delay processing.
Where can I get more details? For more information about consolidating, check out these resources:
--Student Loan Borrower Assistance provides comprehensive information for student loan borrowers.
--FinAid has lots of great advice about all kinds of financial aid, including consolidation loans.
--The Direct Consolidation Loans site has consolidation application forms and FAQs.
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