Loan Consolidation Repayment Plans: Are They All the Same?

Are you making a number of student loan payments to different lenders each month? Do those monthly payments leave you in the poorhouse? Loan consolidation may be the answer to your financial problems.

What is Loan Consolidation?

You decide which of your eligible educational student loans you want to include in a consolidation loan. When the consolidation loan is approved, it pays off the balances on the loans that have been included, and you are responsible for repaying the consolidation loan. The payments on the old loans are replaced by one monthly payment, which is generally lower than the ones you were previously making. Keep in mind, however, that there are pros and cons to every financial solution.

Where Can I Apply for a Consolidation Loan?

Consolidation loans are available from lending institutions such as banks and credit unions or from the federal government through the Federal Direct Consolidation Loans program. Each program has slightly different eligibility criteria and payment plans. Look at the Federal Direct Consolidation Loans website and talk with individual lenders and compare the information to determine the best deal for you.

What Types of Consolidation Loan Payment Plans are Available?

The Federal Direct Consolidation Loans program offers the following payment plans:

• Standard. Loan payment amount is the same each month (minimum $50) and is based on the total amount you owe. Repayment period can be between 10 and 30 years.
• Graduated. Low payments to start, gradually increasing every two years (minimum payment equal to monthly accrued interest). Repayment is based on the total amount you owe and the repayment period can be between 10 and 30 years.
• Extended. For loan balances over $30,000. Repayment period can be up to 25 years. Loan payments can either be a fixed amount each month ($50 minimum) or start low and increase every two years.
• Income Contingent. Repayment is based on loan balance, annual income, and family size. Repayment period can be up to 25 years.

Lenders offer consolidation loans with repayment plans similar to those offered by the Federal Direct Consolidation Loans program--Standard, Graduated, Extended, and Income Sensitive. Your personal financial circumstances generally dictate which repayment plan is the best one for you. Use the online calculator on the Federal Direct Consolidation Loan website to find out approximately what your monthly payment would be under each repayment plan and have your lender make the same calculations. Compare both options before you make a decision about which repayment plan is best and who will be processing your loan.

What Else Do I Need to Know?

Before you make a final decision about a consolidation loan, make sure you take the following information into account:

• The interest rate you receive on the consolidation loan will be higher than some low interest loans like the Perkins Loan (with 5% interest). You may want to exclude low interest loans from consolidation.
• If you have variable interest loans and consolidate to a fixed rate, you may regret it if interest rates drop further.
• You can lose forbearance, deferment, cancellation, and forgiveness benefits for the individual loans you consolidate.
• Your monthly payment may decrease with a consolidation loan but remember that you pay more interest if you extend the repayment period.

These are only a few of the things you should look at before you decide whether or not to consolidate. Do your research, comparison shop, and make a wise financial decision.

Sources:

• National Student Loan Program

About the Author:
Judi Sandall is a graduate of the State University of New York, with a BA in English Literature. She is a technical writer and editor who worked in student financial aid for over 20 years.