Types of Government-backed Consolidation Loans
Managing a deluge of bills and student loans can be overwhelming. If you're having trouble repaying them, you should consider a government consolidation loan. Be aware that these loans are not grants and must be repaid.
While there are many types of consolidation loans, the only type
of government consolidation loan is for consolidation of student
loans. Through this loan, the Department of Education (DOE), in effect,
purchases your outstanding student loans and pays them off. The
agreement terms are then between you and the DOE and can be
negotiated; they may be able to offer you a lower interest rate
than you may have had with the individual lenders, via a longer
term loan. (Bear in mind that the only types of loans that can
be consolidated via the DOE are federal student loans. Should
you have other unmanageable debt such as credit card or medical
bills, there are other consolidation loans available for those
types of debt, and credit counseling may prove valuable.)
Video: Federal Student Loan Consolidation Information
If you do decide to consolidate, you'll have only one payment, one due date, and one set of terms to worry about. The terms may be renegotiated as your financial needs change. Payments toward the new loan will be made either monthly or quarterly.
There are two types of government consolidation loans:
Direct Consolidation Loans (repaid to the DOE) and FFEL
Loans (repaid to a private party lender but authorized by the
DOE). DCLs are generally more flexible as far as repayment
terms; to qualify, you must have at least one FFEL or Direct
Loan that is in
deferment, repayment, grace, repayment, or default status.
In-school status loans can't be included in a DCL. If you are
unable to obtain the FFEL loan, you may then apply for a DCL.
Federal Student Loan Consolidation Programs
Federal student loans of all sorts generally qualify
for consolidation: FFEL Stafford Loans, Federal Perkins Loans,
FFEL PLUS Loans, Health Education Assistance Loans, and Federal
Nursing Loans. The consolidation loan is known as Federal Direct
Subsidized Loans or Guaranteed Student loans. Your parents may
also apply for the loans. PLUS loans are not eligible until they
have been completely disbursed. Direct Stafford Loans and FFEL
may be consolidated once the student drops below half time,
leaves school, or graduates.
As the loans can be for terms as long as 25 years, the payments
can be dramatically lessened. To determine the interest rate,
each loan's current interest rate is weighted against the loan
amount, such that the interest rates are averaged. Should you
have collateral such as a house or car or other item of
significant value (or a co-signer), you will decrease your
interest rate. As of this writing, the interest rate cannot
exceed 8.25%.
If you're married and both spouses have loans, only one party
needs to qualify for both party's loans to be consolidated. It
is important to note that if either party dies, the remaining
party is still responsible for the other person's loan
repayment.
Types of Loan Repayment Plans
There are several types of repayment plans:
- Standard repayment: Fixed payment amount with minimum payment of $50. Loan duration of up to ten years.
- Extended repayment: Eligibility requires loan debt in excess of $30,000; repayment period is 25 years and payments are fixed.
- Graduated repayment: Payments increase in amount every two years. Duration is up to ten years.
- Income contingent repayment: Payments are recalculated every year based on your income, loan amount, and family size. Duration is up to 25 years. If there is a remaining balance after that time, it is discharged.
If you wish to apply for a government consolidation loan, you may do so via phone, mail, or electronically. You will need to create a cover letter and complete several forms. Be sure to have bills, account statements, and loan records at hand to complete the promissory note and loan application. Your school's financial aid administrator may be able to help you with the process as well as compiling your information.
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