Federal students’ loans are guaranteed by the US government. In federal students’ loan consolidation, the Department of Education purchases existing loans and then charges a fixed interest rate based on a weighted average of the prevailing interest rates of the loans you are consolidating. Most federal loans including Direct PLUS, Stafford and Perkins can be consolidated with other federal loans.
The advantage of federal debts consolidation loan is that borrowers can apply at any time regardless of their credit score status and loan defaults at Loanconsolidation.edu.gov and they will always get fixed interest rates. In addition to this, regardless of market fluctuations, there is a cap of 8.25% interest rate on consolidated federal loans.
Student loan entitlements are guaranteed and recovered by the students’ future income calculated using a means tested system from the student’s future income. The loans cannot be included in bankruptcy but they do not affect a person’s credit rating.
Consolidating with a private lender is not advisable. It may lower the interest rates that you pay but in exchange you will lose valuable consumer protection such as access to federal income based payment, forgiveness programs, generous forbearance and deferred options. Private lenders give the loans to the lowest risk borrowers (people with steady jobs, good credit rating and good income). Other lenders restrict this loan to business, law, medical and engineering degrees. Some of the banks offering federal students loan refinancing are the Royal Bank of Scotland plc.’s Citizens Financial Group, SoFi and CommonBond.
Parents with Federal PLUS loans might benefit from consolidating their federal loans with a private lender if they have at least $20,000 in such loans and the interest rates can be reduced by at least 2%.
The extent to which the federal student loan consolidation is optimal depends on particular student loan specifics. You should think about the benefits and drawbacks of consolidating your student loans before taking it up. You should also choose a repayment plan for your consolidated loan which include: extended repayment plan, PAYE, Income Contingent Repayment and Income Based Repayment. Many of these will reduce your monthly payment but extend your loan term such that at the end of your repayment you will have paid more interest.
Generally, consolidating loans helps you in keeping up with different loan payments and offer fixed interest rates.
Student loans normally have no prepayment penalties. Federal student loans should be consolidated as soon as possible and should be prioritized over personal loan repayments as rates increase every year and it’s better to lock in the lower current rates.