The Dept. of Education offers several types of student loan debt consolidation loans. The first we discuss is called the Special Direct Consolidation Loan, which was announced in January 2012, and expires on June 30, 2012. The other is a long-term Dept. of Education plan to consolidate a wide array of subsidized and unsubsidized federal student loans.
A quick note before we dive into the specifics of both programs: If you seek a government debt consolidation loan for a credit card debt, we do not have good news for you. In general, the federal government does not offer loans or grants to pay for credit card debt. However, if you are disabled or unemployed, you may be eligible for government benefits. See Benefits.gov, a collaborative effort of 17 federal agencies to provide a source of information to help people understand which benefit programs they may be eligible for and how to apply.
According to the Dept. of Education, Special Direct Consolidation Loans are intended to help borrowers manage their debt by ensuring all of their federal loans are serviced by the same organization. The consolidation creates one bill and one payment and a .25% cut in their interest rate. The maximum interest rate a borrower who refinances will pay is 8.25%.
The Special Direct Consolidation Loans program ends June 30, 2012, and is open for borrowers who have at least one:
You must have on eligible loans that is current or less than 270 days delinquent. If you are more than 270-days delinquent, you can qualify if you make your loan current or less than 270 days delinquent. In other words, eligible loans must be in grace, repayment, deferment, or forbearance.
The Dept. of Education says the following commercially held FFEL loans are eligible for the special program:
That covers many loans. But many other student loan types are not eligible, according to the Dept. of Education, including:
To learn if you meet the eligibility requirements, the Dept. of Education states you should follow these steps:
If you do not know your PIN, go to www.pin.ed.gov.
A traditional Direct Consolidation Loan allows borrowers to include all eligible federal loans in a consolidation. The advantages of a Direct Consolidation loan are:
The following table compares a Direct Consolidation Loan and the Special Direct Consolidation Loan. Note that if you qualify for a Special Direct Consolidation Loan, you should start this application process before attempting a Direct Consolidation Loan. Do not start the traditional Direct Consolidation Loan process if you believe you qualify for the Special Direct Consolidation Loan.
|Traditional Direct Consolidation Loan||Special Direct Consolidation Loan|
|Repayment Term||The repayment term for the loan starts over, giving students longer to repay their loan. A longer repayment term may result in lower monthly payments but will ultimately increase the amount the borrower will pay over the life of the loan since more interest will accrue during a longer repayment period.||Each loan that is consolidated retains its original repayment term. As a result, borrowers will pay less interest over the life of the loan than they would under the traditional consolidation program.|
|Interest Rate||A single fixed rate based on the weighted average of the interest rates of those loans being consolidated rounded up to the nearest one-eighth of 1%, not to exceed 8.25%.||If more than one loan is consolidated, different parts of the consolidation loan may have different interest rates. The interest rate of each commercially-held FFEL loan that is consolidated will be fixed at the current rate on that loan as of the date of consolidation, reduced by 0.25% (not to exceed 8.25%).|
|Automatic Debit Benefit||Eligible for a 0.25% interest rate reduction if the loan is repaid through the servicer’s automatic debit system.||Eligible for a 0.25% interest rate reduction (in addition to the 0.25% reduction for consolidating) if the loan is repaid through the servicer's automatic debit system.|
The following loans can be included in a Direct Consolidation Loan:
Ineligible loans include:
If your loans qualify, apply online at the Dept. of Education's application page.
Federal student loan borrowers who refinance do not lose any of the flexible repayment options they have with their existing loans. In particular, deferment options, income-based repayment, and subsidy benefits remain. However, borrowers eligible for a grace period on FFEL Subsidized/Unsubsidized Stafford Loan or Direct Subsidized/Unsubsidized Loan lose the grace period by consolidating while they are in an in-school status. There are other deferment periods for certain PLUS loans that are lost in a consolidation. Check the fine-print on a consolidation before you commit yourself to the loan so that you understand any potential downsides.