A Direct Loan Consolidation Loan allows a debtor to combine a number of other federal student loans that he might have taken sometime into one single loan. This results in a single monthly repayment instead of multiple monthly repayments, thereby significantly reducing the interest rate and the financial burden.
Pros and cons of loan consolidation
An applicant for loan consolidation should ensure that the loan amount being taken will help close all other loans and show a significant amount of savings. While on one hand, consolidation of loan makes repayment of loan easy and lowers the monthly payment, it can also prove to be disadvantageous in increasing the total cost of repaying the loans if you do not plan well before going in for loan consolidation. Consolidation of loan helps in lowering the amount of repayment paid every month by extending the loan repayment period to about thirty years. In case a person pays the total loan amount in thirty years then he will also have to consider the fact that an increase in the loan period will also make him pay more interest rates and therefore an increased loan amount overall by the end of the tenure. So, while consolidation of loans does help a borrower decrease the monthly loan repayment amount, it increase the overall interest rate paid by the time the tenure is complete.
The borrower avails a number of benefits from a loan account like tax reduction, discounts in the interest rates, principal rebates, etc which plays a big role reducing the final amount of loan that gets repaid. In case a borrower with multiple loan accounts consolidates his loans, there are chances that he may have to forfeit these benefits.
Applying for loan consolidation is free and no prepayment penalties are charged.
Lastly, one of the many benefits of consolidating loan amounts is that it helps in improving the credit history of a borrower. A number of open loan accounts in the name of the borrower, actually makes him a bad debtor. This gets reported in his credit history giving him a bad credit score. On the other hand, consolidating all the loans in one account improves his repayment credibility and therefore gives him a good credit score.
All the above pros and cons of a loan consolidation should therefore be considered and then the step to consolidate existing loans should be taken.
Requirements for loan consolidation
The basic requirements to qualify for direct loan consolidation are:
- The applicant must have qualified for at least one Federal Family Education Loan (FFEL) and should be either paying for it at present or should have cleared the loan amount.
- Direct loan consolidation is allowed only after the applicant has either graduated or left school or has completed at least half enrollment period.
- Default education loan amounts can also be consolidated if the applicant makes satisfactory arrangements for repayments with the current lenders or makes an agreement under the Income Contingent Repayment Plan or the Income Based Repayment Plan to repay back the loan on time.
- If the applicant already has a Direct Consolidation Loan then he will not be able to avail another consolidation of loans unless an additional FFEL gets included.
Most of the federal loans can be consolidated except for the parent plus loan. This is because these loans are taken in the name of the parents and cannot be transferred to the student’s loan. The interest rates on direct consolidation loans remain fixed and are not connected to the market’s performance.
For more info about student financial aid, please check educationcenters.com