Direct Loan Consolidation

With a direct loan consolidation, individuals can combine multiple direct loans into a single contract under one lender and involving only one monthly payment. For students, whom are the most common recipients of direct student loans, consolidation can be a lifeline as they search for new jobs and begin to build careers. During this transition, funds are very tight. Graduates usually scrape every penny available to pay bills until their careers stabilize. Under the right circumstances, a direct loan consolidation can help.

By definition, direct loans are ones made directly between a borrower and lender with no third party involved. Granted by the federal government, most direct student loans administered by the Department of Education. These contracts differ from private loan foundations. Students must have at least one direct loan - usually a Stafford, Perkins or Guaranteed Student Loan - to qualify for a direct loan consolidation. Parents who take out financing for their child's education can qualify through a PLUS loan. Married couples can consolidate their contracts together as well as long as one meets the requirements. Borrowers can check with a Federal Family Education Loan (FFEL) program lender to find more information about qualifications.

Student borrowers consolidate for many reasons. One of the key factors is saving money for the short term or the long term. The ideal situation, of course, would be to lock in a low fixed rate that would reduce monthly payments as well as the total repayment on the term of the contract. While this is possible, most borrowers hope to secure a rate that will stay below the average adjustable rate originally secured when the money was borrowed. Direct loan consolidation rates are competitive, adjusted every July 1st but will never be higher than 8.25% for student borrowers and 9.0% for parents with PLUS loans. Other students prefer the convenience of dealing with one lender versus multiple lenders or multiple loans under the umbrella of a single lender. Payments are condensed to one easy installment each month. Borrowers also may be eligible to gain more deferments - delaying payments for extenuating circumstances like continuing education, severe illness or financial hardship - with consolidation.

Consolidation also offers several flexible repayment plans to meet the special needs of borrowers. Although monthly payments on the standard fixed-rate payment plan are normally higher than other options, it is the fastest way to pay off educational financing. The normal term limit is 10 years. Students can choose an extended repayment plan to lower their monthly payments. Term limits can be extended from 12 to 30 years to accommodate minimum installments. A graduated repayment plan starts with lower payments that slowly increase in two-year steps over a fixed period of time. Installments increase as borrowers begin to establish careers and earn higher salaries. Income contingent repayment plans are only offered through direct loan consolidations for students. Under this plan, payments are specifically linked to a borrower's salary. This is a great option for graduates working in non-profit or community service careers with lower salaries. However, income contingent plans are not available for parents with PLUS loans. Throughout the duration of the loan, as personal situations change, borrowers can switch plans at any time for any reason.

Consolidation is free and carries no penalties for pre-payment. No credit checks are usually required. Loan recipients are given a six-month grace period before their first payment is due. Repayments begin 60 days after the first disbursement is issued. Interest is generally not charged while the student is still in school or during a grace or deferment period. Interest does accumulate during forbearance periods where payments are decreased due to illness or economic hardship. The Taxpayer Relief Act of 1997 makes all interest charges on direct students loans tax-deductible. However, if payments are missed, the contract enters default and the remaining balance is due in full. Borrowers who have defaulted on student financing risk extra collection charges, eligibility of further deferments, and even legal action. Wages could be garnished and a notification placed on his or her credit record. Direct loan consolidations are only discharged in case of death or a permanent disability that didn't pre-exist the contract. Even declaring bankruptcy will not interrupt repayment, so choosing a plan that is affordable is vital. "Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also." (Matthew 6:19-21)

Deciding whether or not to consolidate loans is an important decision. Consolidation reduces monthly payments by extending repayment terms. This may mean that borrowers will pay more in the long term than they would with their original contract. In some situations, that cost may actually double. Students may also lose other benefits by consolidating. Deferments, cancellation options, interest rate discounts or principal rebates may not carry over to the new contract. It is vital to carefully weigh all options before making a final decision. When to consolidate is also important. Since borrowers can usually secure lower rates during a grace period, many wait until the July rates are announced (usually in June) before deciding to lock in the rate for that year. But although borrowers can change direct loan consolidations, once consolidated, the contract can never be unconsolidated.

Direct loan consolidation can save students up to 50% on the repayment of student loans, but it can also cost them just as much. Educational financing is a responsibility but with risk. For many young adults, it is the first of many major financial decisions. Review the options available. Ask questions and seek wise counsel from professionals. Education is worth the cost if handled responsibly.

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