Federal Student Loan Consolidations

Federal student loan consolidation is a means of relief for students who find themselves unable to pay their existing student loans. Whether they are in default or have reached the point where they will soon be in default, this option is worth exploring. Once borrowers are approved for federal student loan consolidations, the old loans disappear. Payments are set up based on yearly family incomes, and if the family earns less than $900 above the poverty line, no payment is required at all. Perhaps the best feature of this plan is that the old loan will no longer be listed as a default on credit records, and collection efforts will cease. Applications are free, and the forms can be received by calling a number listed on the Internet. If the current ones are already in default when application is made for federal student loan consolidation, the student is required to either make three reasonable and affordable payments on the account or accept a payment plan based on income information obtained from the IRS.

Once the consolidation is granted, the individual is again eligible for other financial aid packages, including grants, that he or she might need to finish the education. Of course, it is wise to apply for a federal student loan consolidation before the original agreements are in default. This avoids the damage to credit rating that results from a default, which could include loss of tax credits and garnishment of wages and further penalties. There are some restrictions to these programs that must be understood. First, the borrower must certify that he or she could not get a Federal Family Education Loan (FFEL) with a satisfactory repayment schedule. Oddly, the borrower does not actually have to apply for the FFEL and, in fact, is discouraged from doing so when applying for consolidation. Federal student loan consolidations have lower interest rates and lower payments than does the FFEL.

It is in the borrower's best interest when paying off a federal student consolidation loan to pay more than the minimum required payments. As with any credit agreements, low or minimal payments will not cover the interest accruing, and the borrower ends up paying interest on interest, thus increasing the amount of money paid significantly. Borrowers have the option of seeking a deferment if necessary, and during that period the United States government pays the accrued interest. In all cases, these agreements have a cap on the interest that may be charged. Another advantage with federal student loan consolidations is that after twenty-five years of payments, the debt is forgiven. If there have been periods of forbearance or deferment when payments were not made, they do not count in the calculation of the twenty-five years, and when federal student loan consolidations are forgiven, the amounts of the loans have to be counted as income on the tax returns of the borrowers. "For I know the thoughts that I think toward you, saith the LORD, thoughts of peace, and not of evil, to give you an expected end," (Jeremiah 29:11).

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