How to Consolidate Student Loans
Consolidation loans for students are available as "Federal Consolidation Loans", backed by federal government and "Private Consolidation Loans", funded by private lenders with no involvement of federal government, resulting in higher interest rates.
Federal Consolidation Loans are available either as "Direct Consolidation Loans" where funds are routed through education department or "FFEL Consolidation" where FFEL lenders are involved but with federal government capping maximum interest rate at 8.25% and no application fees or prepayment penalties. It must be remembered that the federal government has set the maximum interest rates but lenders can offer loans at lower interest rates or provide any discount like discount of 0.25% upon enrolment in electronic debiting of accounts for repayment or interest rate reductions to the tune of 1% upon on-time monthly repayments for thirty-six months and so on. It is better to gather information prior to consolidating with a particular lender. Effective July 1, 2006, borrowers can consolidate their federal educational loans only once they enter grace period, leave school, drop below half time enrollment or loans enter repayment. Also, married borrowers can no longer consolidate their loans together with their spouse.
Applications for consolidation of student loans can be obtained from and submitted with lenders. For "Direct Consolidation Loans" applications may be obtained from Education Department's Direct Loan Consolidation Wing by post or via email at loan_consolidation@mail.eds.com. Online applications and promissory notes are available at the web site http://loanconsolidation.eg.gov. It is important to note that private loans can not be consolidated into federal consolidation program but mentioning them may help in assessing repayment period and interest rates. Unless, otherwise specified by applicant, all borrowers are placed into STANDARD repayment plan which stretches repayment period up to ten years keeping up with lower interests and monthly payments. Alternative repayment plans available for both Direct and FFEL consolidation loans are Extended Repayment Plan stretching repayment up to thirty years, thereby reducing monthly payments but increasing overall interest paid; Graduated Repayment Plan which initially starts with lower monthly payment only to increase with time, a plan suited for people who expect income to rise with time; Income Contingent Repayment Plan or ICR where interest rates and monthly payment is adjusted annually with due consideration to income, family size and any remaining balance on loan after twenty-five years is forgiven provided taxes are paid on forgiven amount; Income Sensitive Repayment (ISR) Plan similar to ICR but available only in FFEL Consolidation program. ICR plan available only for Direct Consolidation loans (except Direct PLUS) requires your authorization to let IRS inform Education Department about your income.
Once application is submitted, it is reviewed and entered into system for processing. A unique ID is generated for every application entered into system, to track the status of your application. Verification is done about loans you wish to consolidate and IRS, credit bureaus may be contacted depending upon repayment plans you have selected. Once verification is complete, a loan statement is mailed to borrower for error adjustments. If the loan statement is understood to be error free or no reply obtained within ten days, loans to be consolidated are paid off to the loan holders who subsequently inform borrowers about the full payment of loans and such information in detail is submitted with the Direct Loan Servicing Center. A welcome letter with details about loan consolidation and repayment is then sent to the borrower. Procedure is almost similar for FFEL Consolidation Loans, just that applications should be submitted with the FFEL lenders.
Until a written notification is received, current loans must be paid as usual. Application for consolidation is not an excuse to skip such payments. Repayment plans may be changed only once a year in case of FFEL consolidation loans but any time in case of Direct Consolidation loans. There is a provision for re-consolidation of already consolidated federal loan but this does not re-lock the interest rates and is permitted only when previously unconsolidated federal loan is included into reconsolidation. IRS publication 270 allows up to maximum of $2,500/yr. as tax deduction, for which more information can be obtained from IRS itself. Federal consolidation loans once made can not be unmade.
In nutshell, consolidation loans should be worked out judiciously with due consideration of long term goals and benefits besides interest rates and monthly payments.
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