How Consolidation Prevents Default
The average student loan debt has climbed to $29,400, according to a recent report from the Institute for College Access and Success. The monthly payment for a loan of this size, on a standard repayment plan, is about $340. To afford this monthly payment, it is estimated that you need to have an annual income of approximately $40,000.
Unfortunately, many students borrow significantly more than $29,400, many graduate without being able to find gainful employment, and still more leave college with loans and no degree. Student loan debt relief can be achieved through consolidation and choosing an affordable repayment plan.
Benefits of Consolidation
The US government created the student loan consolidation program to make student loan payments more affordable. When you consolidate your Federal student loan debt, you have access to repayment plans with lower to no monthly payment (depending on your income), one convenient monthly payment, a fixed interest rate for the life of the loan, and renewed deferment options.
Affordable monthly payments
Consolidating can help you lower your monthly payments. Some borrowers, under the income-based repayment option, are able to reduce their monthly payment to zero. Depending on your profession, you may also qualify for loan forgiveness after making 120 on-time payments.
The US government estimates that many of the borrowers who default on their student loans would benefit from enrollment in an income-based plan, which is available through consolidation. If you are having trouble making your monthly payments, have exhausted your deferment and forbearance options, and/or want to avoid default, a Direct Consolidation Loan may help you.
One monthly payment
If you make payments to more than one lender every month and want the convenience of a single monthly payment, consolidation may be right for you. With a Direct Consolidation Loan, you will have a single lender and a single monthly payment.
Research shows that many people miss payments not because they don't have the money or are strategically trying to default on their debt, but because they lack the organization to make on-time monthly payments to 5, 10 or 15 creditors each month. When you consolidate, you could be cutting out more than 100 payments per year, depending on how many individual loans you have.
Fixed interest rates
If you have variable interest rates on your Federal education loans, you may want to consolidate. The interest rate for a Direct Consolidation Loan is fixed for the life of the loan. The rate is based on the weighted average interest rate of your pre-consolidation loans, rounded to the next higher one-eighth of one percent and cannot exceed 8.25 percent.
How much are you willing to pay over the long term?
Several consolidation options require a longer repayment term. Like a home mortgage or a car loan, extending the repayment term increases the total amount you pay. A longer term, however, may help you lower your payment to an amount you can afford, increasing your ability to make on-time payments, stay current and repay your loan.
How many payments do you have left on your loans?
If you are close to paying off your student loans, it may not be worth the effort to consolidate or extend your payments.
How to Qualify for Loan Consolidation
- You have at least one Direct Loan or Federal Family Education Loan (FFEL)
- Your loans are in grace, repayment, deferment or default
- Loans eligible for Direct Consolidation Loans
Subsidized Federal Stafford Loans
- Direct Subsidized Loans
- Subsidized Federal Consolidation Loans
- Direct Subsidized Consolidation Loans
- Federal Insured Student Loans (FISL)
- Guaranteed Student Loans (GSL)
- Unsubsidized and Nonsubsidized Federal Stafford Loans
- Direct Unsubsidized Loans, including Direct Unsubsidized Loans (TEACH) (converted from TEACH Grants)
- Unsubsidized Federal Consolidation Loans
- Direct Unsubsidized Consolidation Loans
- Federal PLUS Loans (for parents or for graduate and professional students)
- Direct PLUS Loans (for parents or for graduate and professional students)
- Direct PLUS Consolidation Loans
- Federal Perkins Loans
- National Direct Student Loans (NDSL)
- National Defense Student Loans (NDSL)
- Federal Supplemental Loans for Students (SLS)
- Parent Loans for Undergraduate Students (PLUS)
- Auxiliary Loans to Assist Students (ALAS)
- Health Professions Student Loans (HPSL)
- Health Education Assistance Loans (HEAL)
- Nursing Student Loans (NSL)
- Loans for Disadvantaged Students (LDS)
- Loans not eligible for a Direct Consolidation Loan
Loans made by a state or private lender and not guaranteed by the federal government
- Primary Care Loans
- Law Access Loans
- Medical Assist Loans
- PLATO Loans
- Loans in an in-school status
What about loans in default?
Borrowers can consolidate most defaulted education loans, if they make satisfactory repayment arrangements with the current loan holders or agree to repay their new Direct Consolidation Loan under the Income Contingent or Income Based Repayment Plan.