Consolidating several federal student loans into a single Federal Direct Consolidation Loan may help student loan borrowers lower their monthly loan payments and simplify their finances. Federal Parent PLUS Loan borrowers need to consolidate to access income-driven repayment and loan forgiveness options.
But, borrowers should also consider the alternatives to a Federal Direct Consolidation Loan given its drawbacks. For example, consolidation prevents borrowers from paying off higher interest rate loans more quickly. Consolidation also resets the number of qualifying payments made toward potential loan forgiveness to zero.
Extend the Loan Repayment Period
Extending the repayment period of student loans beyond the standard 10-year term reduces the monthly payment burden but also increases the total interest paid over the life of the loan.
There are two main options for extending the repayment term of federal education loans. One involves a federal consolidation loan, while the other does not require consolidation.
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The repayment term for a Federal Direct Consolidation Loan is 10, 12, 15, 20, 25 or 30 years. The term is based on the amount of the consolidation loan, as shown in this table.
If the amount of the consolidation loan is at least $60,000, the repayment term is 30 years. This is the longest repayment period available for federal education loans.
Borrowers seeking the maximum possible repayment period should consider repayment plan alternatives to a Federal Direct Consolidation Loan if their total indebtedness is less than $60,000. For example, borrowers with $30,000 or more in Direct Loans and Federal Family Education Loan (FFEL) Program Loans can get a 25-year extended repayment plan without consolidation.
Borrowers with a lower income relative to their education debt level should consider income-driven repaymentoptions in addition to loan consolidation. These repayment plans offer 20 or 25-year repayment terms with loan payments based on a percentage of the borrower’s discretionary income.
Access to Income-Driven Repayment and Loan Forgiveness
Federal Parent PLUS Loans and Federal Perkins Loans are not directly eligible for income-driven repayment and Public Service Loan Forgiveness (PSLF), except through a federal consolidation loan. FFEL Loans are not eligible for the PSLF unless included in a Federal Direct Consolidation Loan.
If Parent PLUS Loans are consolidated into a Federal Direct Consolidation Loan, the consolidation loan is eligible for income-contingent repayment (ICR) if the Parent PLUS Loans entered repayment on or after 7/1/2006. ICR enables parents to cap their monthly payments based on their income. And any remaining loan balance after 25 years of payments (300 payments) is forgiven. The forgiven loan balance is taxable under current law.
Borrowers with Federal Perkins Loans may refinance them with a Federal Direct Consolidation Loan. The new consolidation loan becomes eligible for one or more income-driven repayment plans.
Although Federal Perkins Loan borrowers become eligible for PSLF through loan consolidation, they also give up the loan forgiveness options available under the Perkins Loan program. For example, a nurse working for a private practice would be eligible for loan forgiveness under the Federal Perkins Loan program but not under the PSLF. Borrowers who consolidate a Federal Perkins Loan lose the loan’s subsidized interest benefits and the remainder of the loan’s 9-month grace period.
Recover Loan(s) from Default
There are three options for getting a student loan out of default: full repayment, loan rehabilitation, and consolidation. Loan rehabilitation is usually the best choice for a first-time default. Once 9 voluntary income-based payments are made within 20 days of the due date over 10 months, the default is removed from the borrower’s credit history.
Recovering a defaulted loan through consolidation does not remove the default from the borrower’s credit history. But, a defaulted loan can only be rehabilitated once. Loans that are not eligible for rehabilitation need to be consolidated or repaid in full. An income-driven repayment plan is required for the new Federal Direct Consolidation Loan unless you make 3 full payments on the defaulted loan before consolidation. If the 3 payments are made, the borrower ong the available Direct Consolidation Loan repayment options.
