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Federal Student Loan Consolidation
from:There are two Federal Student Loan Consolidation Programs in the United States that allow a student to consolidate all Student Loans into one single loan:
The Federal Family Education Loan Program
Federal Direct Student Loan Program
The above two Programs were established to address the following loan types:
Stafford Loans
PLUS Loans
Perkins Loans
The offer of fixed interest rate for the whole loan life cycle is one key characteristic of Consolidation Loans by federal government targeting at students.
A Brief History of the Federal Program
The Federal Student Loan Consolidation Program was created in 1986 to allow graduates with more than one Federal Loan to consolidate them all into one single loan package. Such consolidated loans had a variable interest rate from 1986 to 1998 but in 1998, the US Congress acted to convert the variable rate to one of a fixed rate weighted average.
The latter came into force on February 1, 1999. Before this time, a Consolidated Student Loan from federal government used to have a variable rate. That rate was determined by either the university or the lender, whoever is the loan originator.
In 2005, the Government Accountability Office (GAO) stepped in, took under consideration the savings of consolidating all of the consolidation loans.
On the basis of future variations in interest rates, loan volume, percent of defaults and cost estimates from the Department of Education, GAO concluded that this would cost an additional $46 million. GAO also concluded that this cost would be offset by a savings of $3,100 million which was in part by avoiding a $2,500 million cost in subsidies.
Interest Implications
When compared with Student Loans offered by federal government, the term of payment for Federal Consolidation Loans is longer. It can range anything from ten to thirty years. Even though monthly repayments are lower, the overall cost of the term of the loan is actually higher than with other federal student loans.
The fixed interest rate is derived from using a weighted average of the consolidated loan interest rates. This is done by assigning relative weights according to the amounts borrowed and then rounded up to the nearest 0.125%, but capped at 8.25% interest.
Post-graduation grace periods and special forgiveness circumstances are two features of the original loans that have not been carried over to the consolidation loans.
Don't Rush to Decide
If you have existing loans that cost you considerable money, despair not. Consolidating your loans may be the way to go. However, it is important to appreciate the fact that Federal Student Loan Consolidation is not always suitable for every borrower with Federal Student Loan Payment.
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