Federal Loan Consolidation

Upon graduation it is common for students to think about a consolidation of their federal student loans. The main reasons for this are to have only one loan and one monthly student loan repayment to make, and to obtain a lower payment than would be the case if several loans each had to be paid off separately.

Qualification and Interest Rates

If a borrower meets the qualifications to consolidate his or her federal student loans, then the

lender cannot deny the loan consolidation. Also, the interest rate for a federal loan consolidation is fixed by statute, and this is determined from the weighted average of the individual federally guaranteed loans that the borrower has taken out as a student. The above is not the case with private student loans for which the lender has no obligation whatsoever to grant a loan consolidation, and even if this does occur, the lender can set a much higher rate of interest for the consolidated loan.

Federal Loan Consolidation Deferments

In a federal loan consolidation the borrower has quite a few rights that he or she is entitled to, and the borrowers should be aware of these in the event something happens to their situation and they need to make changes to their payment schedule. If you come under financial pressure for some reason and cannot meet your student loan payments, it is possible to qualify for a deferment of the loan. There are quite a few types of deferments including some for unemployment, military service, in-school deferments, economic hardship, and a number of other reasons. Check here for an overview of these and others: Student Loan Deferment.

Other Borrower Rights With A Federal Loan Consolidation

Other rights exist for borrowers who have completed a federal loan consolidation. If the borrower does not qualify for a deferment, it might be possible to obtain forbearance which means that payments will be halted for a period of time. Another option is to change the repayment plan to make it easier to handle monthly payments. There are several repayment plans based on a person’s actual income, and these can make payments as low as $25 in some cases, although the interest on the loan must at least be paid, so in most cases the repayment would be higher than $25. Needless to say, if this type of a repayment plan is instituted, the loan will take longer to pay back, and the total amount of interest paid will be greater in the end. Repayment plans can be changed each year for federal student loans.

Stay Away From Default

There are serious consequences for defaulting on student loans whether they are federal or private. There are huge penalties and collection fees. The latter alone can be 40% of the amount of the loan plus accrued interest. On top of that you will have to deal with aggressive collection agents who will be harassing you. Many student loan borrowers are shocked to learn that after defaulting they owe several times the amount of the original loan. Unfortunately as many as 20% of people who borrowed $15,000 or more end up in default 10 years after their loan was taken out. This adds up to millions of people who are in deep trouble with their student loan debt and are in many cases overwhelmed by it. One way to avoid this is to adhere to two rules about how much student debt to take on, be it through either private or federal loans. The first rule is to not borrow more than your expected starting salary. So if the average starting salary in your field is $30,000 per year, for example, then don’t borrow more than that amount. The second rule is that the monthly payment amount on your student loan debt should not exceed 10% of your gross monthly salary. If you go beyond that you will be carrying too much debt.

Most people who have federal student loans will be looking at consolidation of those loans. Make sure you are aware of your rights and your options before you sign the papers for a federal loan consolidation.