Direct Consolidation Loans
Student loans have become a major source of debt for many students and almost everyone who goes to college ends up graduating with some loan balance to repay. Those who go on to graduate school or who obtain professional degrees may end up graduating hundreds-of-thousands of dollars in debt. For those students who have student loan balances, both large and small, understanding direct consolidation loans through the government is very important.
Direct consolidation loans are available from the Department of Education to anyone who has eligible loans. When a loan is consolidated through the department, it has many benefits that other types of loans do not have.
One major benefit, for example, is the incredible flexibility in repayment. There are multiple payment plans offered by the Department of Education for those who have consolidated student loans with them. One option is even contingent on a borrower`s income and will never rise above a set percentage of that income. If the borrower is unable to pay the full balance of the loan back based on these income-contingent repayments, the borrower`s loan is eventually `forgiven` after 25 years of payments.
In addition to the multiple options for repayment, the Department of Education also allows people to put their loan in forbearance or deferment both while they are in school and if they are facing economic difficulties upon graduation. Forbearance and deferment both stop the repayment of loans on a temporary basis, but deferment also eliminates the borrower`s obligation to pay interest on certain eligible (subsidized) loans while forbearance does not do so.
Loans consolidated with the Department of Education can also be forgiven or the balances reduced when the borrower participates in eligible community service work. For instance, lawyers or doctors who practice in low-income areas may have a certain percentage of their loan balance forgiven for time worked.
To achieve these benefits, however, you must have an eligible loan or loans. This generally excludes all private loans, but includes Stafford loans issued by Sallie Mae and other student loan lenders, as well as parent and student plus loans and a whole host of other loans.
Debt consolidation loans available through the Department of Education can vary in the types of loans that can be consolidated. For instance, there is a new special type of direct consolidation loan that will be available to borrowers during a limited time period only, from January 2012 through June 30 of 2012.
This new consolidation loan, referred to as a special consolidation loan, allows for borrowers to consolidate with the Department of Education if they have one loan or more that is held by the Department of Education (such as a direct loan or Federal Family Education Loan that is held by a loan servicer affiliated with the department) and any other loans that are serviced by a commercially-held Federal Family Education Loan.
A standard direct consolidation loan does not allow this type of consolidation, so this new special direct consolidation loan opens up new opportunities that were not available before and that will be available for a limited time only. The purpose of the special direct consolidation loan is to give struggling families dealing with debt the opportunity to manage their debts more easily by having all of their student loan serviced by just one lender. This can make payment easier and an interest rate reduction on the FFEL loan can also lower your payments and reduce the total amount you must pay back.
Both direct consolidation loans and special direct consolidation loans provide a great option for repaying student loan debt. Some people also tap into their home equity to repay a student loan, which can work if you are smart about managing your money and if you use a mortgage calculator to ensure you don’t borrow more than you can pay.