Consolidating 4

How Federal Consolidation Loans Work Borrowers can combine multiple (at least two or more) federal loans into a single Direct Consolidation Loan (this is the only federal consolidation loan available).All types of federal student loans can be consolidated together except a Direct PLUS Loan that was taken out by a parent to help pay for a child’s education (student PLUS loans can still be consolidated).However, some lenders also factor in the borrower’s current financial and professional circumstances.The new interest rate can be lower or higher than the weighted average of the old loans and can be fixed (the interest rate won’t ever change) or variable (the rate changes based on the market conditions).That’s why we created this guide – to give borrowers a useful resource that empowers them to choose if student loan consolidation is right for them and which type may best suit their needs.We start by discussing the basics of student loan consolidation and refinancing, and comparing the benefits and drawbacks of federal and private consolidation loans.A weighted average means that the loans with a higher balance influence the interest rate more than loans with a smaller balance – the overall impact of each old loan on the new interest rate is proportional to the comparative balance of that loan.

It takes borrowers an average of 21 years to repay their student loans, while 28% of students are in default (or miss payments for 270 days or more) within five years of entering repayment.Consolidation loans repay old loans with a brand new loan that has its own unique terms and conditions.The basics of federal and private consolidation loans are outlined below.The new interest rate would still be equal to the current interest rates in that situation, but it might save money in the future if the variable rates rise (the new fixed rate would stay the same).The following table illustrates how a weighted average works.There are two types of consolidation loans: federal and private, and they each come with distinct advantages and drawbacks.Federal consolidation loans can only be used for federal student loans, but private consolidation loans can be used for both federal private student loans.Borrowers who are out of college or are attending classes less than half-time can consolidate their federal student loans.Only loans that are in repayment or in the grace period are eligible for consolidation, and a Direct Consolidation Loan must include at least one Direct or FFEL Program Loan.Loans that have been in default can be consolidated after three consecutive monthly payments have been made or if the borrower agrees to repay the consolidation loans under an income-driven repayment plan (where the payments are based on the income of the borrower).In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan.

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