How to Combine Your Educational Debts

Borrowers can consolidate multiple federal student loans into a single loan with a single monthly payment by completing a Direct Consolidation Loan application. You will have to agree to an income-driven repayment plan and select a new loan servicer, among other things. Numerous advantages of consolidation include reduced interest rates, one debt to manage, and monthly payments. However, there are disadvantages as well, like longer payback terms and greater overall interest expenses.

Rates of interest

The government pays down your individual loans and replaces them with a new direct consolidation loan when you combine your federal student debts. The weighted average of your prior interest rates, rounded to the nearest one-eighth of 1%, is the interest rate on the new loan. In the long run, the resultant interest rate can end up costing you more because it might not be any cheaper than your initial rates. Additionally, if you include this loan in your consolidation, you may forfeit your rate reduction if you are a borrower under the FFEL Program who has been eligible for a lower interest rate by making on-time payments. Furthermore, you will no longer be qualified for the public service loan forgiveness and income-driven repayment plans offered by the FFEL Program if you combine your loans with Perkins loans. You can decide whether or not consolidation is the best course of action for you by weighing these benefits and drawbacks. See how your weighted interest rate will be determined and how it will affect your monthly payment and loan term by seeing our application demo.

Options for Payment

If you decide to consolidate, the application's initial section asks you to choose which loans you wish to combine, after which it determines the total amount of the combined loans, the interest rate, and the new repayment schedule. You are also prompted to select a loan servicer. Capitalization is the process of adding any unpaid interest from any of your underlying loans to the principle of your new consolidation loan. Additionally, extending your repayment period through consolidation may result in a higher overall interest payment. Additionally, you may no longer be eligible for some advantages, including income-driven repayment plans and loan forgiveness, if you consolidate your Perkins or Federal Family Education Loan Program (FFELP) debt. Although the application gives you the option to choose a different repayment schedule, we advise keeping with the regular ten-year repayment schedule for your consolidated loan. Additional choices include income-sensitive repayment (only for direct loans), graduated repayment, and extended repayment. However, once more, this will result in a longer repayment period and a higher overall interest payment.

Payback Schedules

The length of time you have to pay back the loans is not shortened by consolidation, even though it can make your payments easier and help you save money on interest. You typically have 30 years to repay your federal consolidation loan. Once you submit the consolidation application, your loan servicer will notify you of the amount and due date of your payment. Based on a weighted average of your existing federal student loan amounts and interest rates, your new direct consolidation loan will have a fixed interest rate. See a detailed explanation of the calculation of this rate here. Any progress you've made toward forgiveness through an income-driven repayment plan or public service loan forgiveness will be reset because the consolidation procedure pays down your existing student loans and establishes a single new loan. The only borrowers eligible for this count reset are those who consolidate prior to April 30, 2024. You'll start over at zero after that date. Because of this, you want to think about looking into other possibilities if you have doubts about your capacity to repay the new loan.

Charges

Consolidating student debts is a popular option among borrowers who want to make regular payments. They can prevent default, which lowers credit ratings, with this assistance. Additionally, it increases the likelihood of making monthly payments on time, which raises the credit score. Before you choose to combine your federal student loans, there are a few things you should know. It will first reset the clock on your loan repayment. Because it will lengthen your loan time, it could result in an increase in the overall amount of interest you pay. Because the new consolidation loan will have a weighted average of your previous rates, it may also result in an increase in your interest rate. Furthermore, any existing rate breaks or rebates won't be applied to the combined loan. Furthermore, the principal of your new consolidation loan will be increased by capitalizing on any unpaid interest from your previous loans. This will result in a larger new balance and a larger total amount owed.