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Getting a college degree can be expensive, so many parents take out loans to pay for tuition and other costs. Federal or private loans are usually the main sources of money for college. Federal Student Aid programmes give out the most money to help students pay for school. Each year, they give out billions of dollars through different programmes. On the other hand, private lending institutions like banks give out private loans, which are also called alternative loans.
Before taking out a loan, students should do a lot of research and compare terms and rates. This will help them avoid high interest rates, strict repayment terms, and more debt in the future. But if a student already owes money to the government or to private institutions, student loan consolidation is the easiest way to make payments.
By putting all of your student loans into one loan, you can extend the time you have to pay them back and lower your overall interest rate. But you can't combine federal and private loans into one. Only individual federal loans, like US Department of Education Direct Loans, Federal Family Education Loans, and Federal Perkins Loans, can be consolidated by the federal government.
Most of the time, these loans have lower interest rates and can be forgiven or cancelled. On the other hand, private loan consolidation is like taking out a new loan to pay off an old one. Depending on a student's credit score after graduation, lenders may offer to consolidate private student loans at lower interest rates.
Federal Loan Consolidation
Federal loan consolidation lets federal student loans be combined into one loan, making it easier and cheaper to make one monthly payment instead of several small ones. The US Department of Education can help you get a federal consolidation loan. Federal loan consolidation can be done in two ways: with traditional direct consolidation loans or with special direct consolidation loans.
Direct Loan Consolidation
Direct Loan Consolidation lets borrowers combine their federal student loans into one package with a single monthly payment for up to 30 years. For the borrower, the repayment method has both pros and cons, such as lower monthly payments over a long period, the possibility of forbearance, deferment, or cancellation in certain situations, different repayment plans based on the borrower's personal situation, no application or processing fees, and fixed interest rates on the loan.
But there are some problems with federal loan consolidation, like the longer time it takes to pay back the loan, which means you'll end up paying more for it and more interest on it, sometimes even double what you were offered for individual loans. There is also a chance that the benefits that came with individual loans, such as lower interest rates, money back on the principle, and loan cancellation benefits, will be lost.
Most federal student loans can be consolidated as soon as the student leaves school, as long as there is at least one Direct Loan or FFEL in grace or repayment status and satisfactory arrangements have been made with loan servicers to settle any defaulted credit. It's hard to consolidate a loan that has already been consolidated, unless it's an FFEL and there are other special circumstances.
The Department of Education will offer Direct Consolidation Loans that are different. To qualify, there must be at least one FFEL from the department and another from a private lender. The goal of special direct consolidation is to put all of a person's federal loans under one organisation so that they can be better taken care of.
Some of the benefits of this loan are a lower interest rate, the same length of time to pay back the loan, which means less interest over time than with traditional loans, the chance to get the loan balance cancelled on commercial FFELs with income-based payments, and the chance to get the loan paid off through the Public Service Loan Forgiveness Program. But even when special consolidation is used, each commercial FFEL keeps its own repayment period.
Borrowers can consolidate their private student loans in a few different ways. Private consolidation student loans are like taking out a new loan to pay off an old one. The main benefit is that you only have to make one monthly payment, and the interest rate may go down over time. The interest rate on this loan is based on the student's FICO credit score and how appealing they are as a person.
