Education loan consolidation
Education Loan Consolidation is an arrangement that allows student loan takers to merge more than one student loan into a single (consolidated) loan that offers many benefits. The process of consolidation can be carried out with any one of the various lenders. It can also be made through the Loan Consolidation program of the Department of Education. The entire procedure takes anywhere between 60 and 90 days. Choosing the online option may decrease the time. The primary aim of the concept of Loan consolidation is to ensure easy repayment of debt and reduce chances of default that arise due to non-payment.
Kinds of consolidation Plans - Direct Consolidation and FFEL Plan .
I. Federal Direct Consolidation Plan: This kind of loan is repaid to the US Department of Education.
There are 3 types of Direct Consolidation Loans: Direct Subsidized Consolidation Loans (according to which the borrower is not liable to pay interest during the grace in school and deferment periods) Direct Unsubsidized Consolidation Loans (according to which the borrower is liable to pay interest during any period after disbursement) and Direct PLUS Consolidation Loans (according to which parents take loans for their undergraduate dependent children and are liable to pay the interest during any period).
One has the option of consolidating even one education loan into a Direct Consolidation Plan. This is usually done to avail of the benefits of flexibility in repayment options.
Plans of Repayment in a Direct Consolidation Plan .
The period of repayment of a Direct Loan Consolidation depends on the kind of plan that the borrower chooses. It ranges from 10 to 30 years. The different plans are: - .
(a) Standard Repayment Plan: Under this plan, a borrower pays a fixed amount 9minimum of $50) for up to 10 years.
(b) Extended repayment Plan: The borrower pays a fixed amount (which is less than that in the Standard Plan) for a period extending from 12 to 30 years.
(c) Graduated Repayment Plan: The repayment period ranges from 12 to 30 years and the monthly amount increases (never more than 1.5 times) every two years. This is more suitable for those who anticipate a steady rise in their respective income.
(d) Income Contingent repayment Plan (This is NOT applicable to those who come under the category of Direct PLUS Consolidated Plan) Monthly installments vary according to the borrower?s income, size of his family and the total debt amount. This has to be paid within 25 years. In case the loan is not fully repaid within this time limit, the balance is released. Nevertheless, applicable taxes have to be paid on the remaining amount after the completion of the 25-year long period.
II. Federal Family Education Loan (FFEL) Consolidation Plan: These loans can be taken from state or private non-profit lenders, such as Banks, Credit Unions and Loan Associations. These lenders are insured by Guaranty agencies, which are, in turn, reinsured by the Federal Government.
The interest rate is the average of interest paid for individual loan programs and is rounded off to the nearest whole percentage.
There are 2 types of FFEL plans Subsidized and Unsubsidized. If all the loans, which have to be consolidated, are subsidized, a Subsidized FFEL Consolidation Loan is approved. But in case even if any of the loan is unsubsidized, an Unsubsidized FFEL Consolidation Loan is the outcome. {This is not so in the case of the Federal Direct Consolidation Loan plan, according to which each (subsidized / unsubsidized) loan retains its own identity. Subsidy benefits of subsidized loans, in the Direct Plan, can be preserved}.
Plans of Repayment in an FFEL .
(a) Standard Repayment Plan .
(b) Graduated Repayment Plan .
(c) Income-sensitive Repayment Plan .
All the above plans have already been explained under Direct Consolidation Plan .
Benefits of Consolidation Plans .
In case of several loans, the borrower has to pay monthly installments to different lenders and, usually, at varying interest rates. Resorting to consolidation of loan, in such a case, is a practical option because the latter entails paying only one lender. Only one payment has to be made in a calendar month (as against several payments in the case of different lenders). The interest rate is also fixed for the entire term of the consolidated loan. This is calculated based on the average of the individual interest rates (that were being paid on different loans, which are being consolidated now). This amount is rounded off to the nearest 1% and does not exceed 8.25%. For the PLUS Plan, interest rate can be does not go higher than 9%. Therefore, the final interest rate is, usually; lower than what has to be paid for individual loan plans.
Another notable benefit of consolidating ones loan is that one has the flexibility of repaying the borrowed sum over a longer period of time. However, here it must also be kept in mind that the longer the period of repayment, the larger is the final sum that one ends up paying in the long term.
And what?s more! One does not have to pay any application or processing fees while applying for a consolidation of loan .
A word of caution! .
It may not be the most sensible idea to consolidate ones loan in cases where the borrower is relatively close to repaying the entire sum of borrowed money. Moreover, once a loan is consolidated, a promissory note is issued. For this reason, a consolidation cannot be undone.
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