Government Assisted Consolidation Loans: An Option For Federal Student Loans Consolidation

July 10th, 2009

What are Government Assisted Consolidation Loans?

Many people are in such a difficult financial situation that they can hardly put food on the table and keep a roof over their heads, yet they have more bills to worry about, like car payments, mortgage payments, student loan payments, and so on. While most types of debt can be included in a bankruptcy filing, one of the types of debts that you can’t include is student loans. So if you have one or several student loans, you might want to look into student loan consolidation.

The type of loan consolidation that we’re talking about right now is called government assisted consolidation loan, and the main pre-requisite is that in order to qualify for it you must have or have had one or more federal student loans. If you do, then you’re eligible for this type of loan and thus you may be able to combine several monthly payments from several different federal education loans into one single loan that pays off all the previous ones. You’re then left with one payment to manage and one lender instead of several, and in most cases, your interest rate will be lower.

These types of consolidation loans are funded and financed by the U.S. Department of Education, their official name is Direct Consolidation Loans, and they’re available to U.S. citizens and legal residents. They allow eligible borrowers to lock in low interest rates and, in many cases, to extend the repayment period beyond that of the original loan. These are the reasons why the payment on the consolidated loan is lower than the total of the previous individual payments.

Who’s eligible? How do you qualify?

As we pointed out earlier, you must be either a U.S. citizen or legal resident, and have outstanding federal student loans to be eligible. Qualification is need-based, meaning that they will look at your disposable income, family size, and the total outstanding balance of your loans to determine how badly you need a government assisted consolidation loan. People with the most pressing need will be approved first.

Benefits of the direct loan consolidation program

You enjoy low interest loans, which makes your debts easier to manage and reduce. You can take up the loan early to lock in low interest rates.
You can choose from four choices of plans to determine how to repay the loan and the terms are flexible. These plans take into consideration your income as a borrower and even your changing needs, such as how many dependent you have. The level of your monthly repayments will take into consideration your income, family size and loan amount.
The consolidation is free: no loan origination costs or fees for consolidation.
You can defer payment for up to 3 years and have a grace period of six months before you start your repayments. The loan has a repayment period of 12-30 years depending on the amount that you need to borrow.

The biggest knock on government assisted consolidation loans is that not everyone is eligible for it: you must have outstanding federal student debt. Fortunately, if you’re looking to consolidate private student loans, other options are available to you. It’s sort of beyond the focus of this post, so we’re just going to mention them in passing.

Private Student Loan Consolidation

If you have one or more private loans you took for college, you might be asking yourself “How do I consolidate private student loans”? Consolidating your private student loans is the same as consolidation your federal student loans: you pay off one or many loans with another large one, except that you deal with your private debt instead of your federal debt. Yet this is where the similarities end.

Most of the time, it’s not recommended to consolidate private student loans along with federal ones. Private loans’ interest rates aren’t as low as their federal counterparts. Yet you can still save money, especially because the consolidation starts the terms of the loan over: the lengthened repayment period gives you a lower payment.

The interest you’ll get from consolidation your private student loans will depend largely on your credit rating. If you have good credit, you can negotiate better rates. If you have bad credit, then you’ll have trouble finding loans that don’t require a cosigner. If you happen to be a homeowner, you can look into home equity loans to consolidate your private student loans. You can compare the interest rates, and as much as possible, try and get a fixed interest rate instead of a variable one.