A Student's Guide To Direct Loan Consolidation

Direct loan consolidation is a program that helps you to manage your student loans. The US Department of Education's Federal Direct Loan Consolidation program allows you to consolidate your student loans into one new loan. The types of student loans you can consolidate among others are Federal Stafford Loans, Federal Perkins Loans, Direct PLUS Loans, and almost all other federal student financial aid programs. The result of this is reduced monthly repayment, extended repayment period and, although not always, lower interest rate.

As various financial aid programs may have different interest rates, the consolidation overcomes this by setting a fixed interest. The interest is determined based on the average of your combined loan interests. The consolidation interest ranges from 0.125% to 8.25%. The average of your combined interest will be rounded up to the nearest 0.125% of a whole 1% (e.g. an average interest of 4.111% will be rounded up to 4.125%). With this calculation, you might end up with a slightly lower or higher interest. A lender sometimes gives dispensations for students by giving lower interest rate or other reduction. You can consult your lender about the possibility of getting this dispensation.

With direct loan consolidation, you can extend your repayment period, resulting in lower monthly repayments. You can extend the period from the standard 10 years to 12-30 years, depending on the amount of your consolidation. Nevertheless, longer repayment period also means higher interest. To deal with this, you can increase your repayment or prepay the debt once your financial condition is recovered.

To apply for a consolidation program, your loans must be in the grace or repayment periods. A grace period is the amount of time during which you are not obliged to make repayments, which usually lasts for 6 or 9 months. Note that once the consolidation process is completed, your grace period will automatically end. So if you want to benefit from you grace period, you can delay the consolidation process until near the end of the grace period.

If you apply for the program during the repayment period, you should continue repaying the loans you want to consolidate. A step-by-step consolidation process can take around 30 to 45 days. When the consolidation process finishes, you are given 180 days to add any loans you might forget to enlist into the loan consolidation.

If you encounter problems repaying your loan, you can contact your lender to grant you a deferment or forbearance. A deferment is a period of time during which your lender allows temporary suspension of payments on your loans, while forbearance is a period of time during which your lender temporarily reduces your monthly payment amount.

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