Main Points
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- You must complete the process of consolidating your federal student loans into a new Direct Loan with a fixed interest rate by April 30.
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- If you qualify for assistance under President Biden’s recent student loan forgiveness initiative or an existing program like SAVE or PSLF, combining your loans can amplify the amount forgiven.
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- All federal loans, including Perkins Loans, Parent Plus loans, and Federal Family Education Loan Program loans, are eligible for consolidation.
The White House introduced a new plan for student debt relief last month. With an approaching deadline, this step could help you maximize the benefits of loan forgiveness programs.
If you possess federal student loans, you have until midnight on April 30 to merge them into a single federal loan. This process can convert non-Direct Loans such as FFELP, Perkins, and others into Direct Loans, offering more advantages for debt relief. It can also simplify managing multiple loans with varied payoff schedules into a single monthly payment with a unified due date.
Even if you already have Direct Loans, consolidating could still be advantageous if you have more than one loan, according to Mark Kantrowitz, a financial aid specialist and CNET Expert Review Board member.
“Consolidation increases the number of payments that count toward forgiveness and synchronizes your forgiveness date.”
By amalgamating your loans, you gain the option to choose an income-driven repayment plan. Depending on the IDR you opt for, having made payments for 20-25 years, your entire balance could be forgiven.
To make an informed decision on loan consolidation, understand why it could enhance your debt relief and learn how to merge your loans electronically, you need to act swiftly.
Learn more: Will Biden’s New Student Loan Forgiveness Plan Cancel My Debt?
Understanding Student Loan Consolidation
Student loan consolidation, analogous to refinancing, merges existing loans into a new loan with a fixed interest rate. Through the federal loan consolidation application, you can consolidate any federal loans into a Direct Consolidation Loan. This consolidation may render you eligible for income-driven repayment and forgiveness programs like SAVE, which you were previously ineligible for.
Managing a single student loan instead of multiple ones can simplify payment tracking. Your monthly payments could reduce depending on the repayment plan you select, yet the repayment period might extend. However, this concern lessens if you qualify for forgiveness post-consolidation.
While private student loan companies offer student loan debt consolidation with perks like lower interest rates, converting federal loans to private ones seldom proves beneficial. Private student loans do not qualify for federal income-driven repayment programs or debt relief.
Will Loan Consolidation Affect My Interest Rate?
If your federal student loans currently possess low interest rates, consolidating should not spike your new consolidated rate in most cases.
The interest rate of your new Direct Consolidation Loan will be determined based on a weighted average of the loans consolidated, rounded up to the nearest 1/8th of 1%, as per the Federal Student Aid, the official website of the Department of Education for student loans.
An exception exists for FFELP loans; consolidating might result in the loss of certain benefits. Kantrowitz explained, “The main concern is for borrowers with substantial interest rate reductions from the FFELP lender. These reductions, granted by the lender, vanish upon loan consolidation.”
You are not obligated to consolidate all your loans; thus, you may exclude FFELP loans to retain your current discount. Evaluate whether you qualify for forgiveness and how consolidation could impact your monthly student loan payment to determine the suitability of this process.
If your student loan has unpaid interest, it will be incorporated into the loan upon consolidation, possibly increasing your principal balance. Account for this when estimating your new monthly payment and forgiveness eligibility.
Uncertain About Eligibility for Debt Relief? Consider Consolidating Your Loans
Consolidating your federal student loans is advantageous for many borrowers, potentially reducing your monthly payment and maximizing debt relief prospects. Particularly beneficial for those with federal student loans that are non-Direct Loans, consolidating can also lock in a fixed interest rate for any federal loans with variable rates.
The latest forgiveness program considers your initial student loan payment date. Consolidating your loans guarantees that your new Direct Loan reflects your earliest loan payment date.
For instance, if you commenced paying federal student loans in 2004 after college graduation and then initiated payments for another degree in 2010, consolidating the recent loans with the older ones into a new Direct Loan could result in complete balance forgiveness in the present year.
Even recent graduates can benefit from loan consolidation and enrollment in an IDR for speedier forgiveness access. Single loans that are non-Direct Loans may also gain from consolidation.
However, if you are not eligible for debt relief, consolidation may not be necessary. Kantrowitz clarified, “If you are not seeking forgiveness of any kind (e.g., not even IDR forgiveness) and have no intention of seeking forgiveness, proceeding with consolidation is not mandatory.”
Steps to Consolidate Your Student Loans
You can consolidate your federal student loans online at StudentAid.gov. To meet the deadline, submit your application before local midnight on April 30. While consolidation is still possible after this date, you may miss out on certain benefits.
To complete the application, you will require your Federal Student Aid ID, personal details, financial data, and loan specifics. The Federal Student Aid website estimates approximately 30 minutes to finalize the consolidation application for your loans.
You can start the application process now at studentaid.gov/loan-consolidation.
Following application submission, consolidation processing may take up to 60 days, according to Kantrowitz. During this time, your student loan payment tally might show zero. This does not signal a problem but indicates work is in progress on your adjustment count.
Missed the Deadline? Here’s What Happens
If you consolidate your loans post the April 30 deadline, you can still receive credit for prior payments on direct loans, albeit potentially lesser credit. Instead, payment count will be based on a weighted average.
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Source: www.cnet.com