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A consolidation loan is an excellent way to streamline your federal loans. A consolidation loan combines eligible federal loans into one loan with one payment and one interest rate. The interest rate is determined by taking the weighted average of all the loans that you want to put into the consolidation loan. The weighted average is then rounded up to the nearest 1/8th of one percent. These loans provide an excellent way to access different repayment plans and alleviate the financial hardship of repaying your federal loans.
Payment can be determined in several ways, and there are multiple options to repay a consolidation loan. The repayment period for a consolidation loan is determined by your total amount of student loans including private loans (even though private loans are not consolidated under this plan). However, you cannot include private loans exceeding the value of the consolidation loan.
For example, if you want to consolidate $15,000 in federal loans and also have $40,000 in private student loans, you can only include $15,000 of the $40,000 when determining the repayment period of the consolidation loan. In this example, it would be $30,000 or 20 years. Below are the repayment periods that a consolidation loan is eligible for based on total college debt.
|Total Student Loan Debt||Repayment Period|
|$0 – 7,500||10 Years|
|$7,500 – 10,000||12 Years|
|$10,000 – 20,000||15 Years|
|$20,000 – 40,000||20 Years|
|$40,000 – 60,000||25 Years|
As you can see, a consolidation loan is a great way to lower the payment of your federal loans by extending the repayment period. The tradeoff is that you will end up paying more interest in the long run. However, if you are financially struggling to make ends meet, this may be necessary to prevent hardship. While a 30 year loan may seem like a long time, you could always pay more as your salary increases, or enter into other repayment plans.
LoanMajor’s college calculators use a consolidation loan if the borrower cannot afford a standard 10-year repayment plan because it can make the monthly payment more affordable. By extending out the payments of the low interest rate federal loans, it makes it easier for the borrower to afford to pay the higher interest rates on private loans. Once the private loans are paid down, you can put that extra money towards paying the federal loans.
Some other repayment plans that you can take with a consolidation loan are the graduated plan and income-driven plans such as REPAYE and PAYE. These both have their advantages and drawbacks, and work differently than the typical standard plan does. However, they can provide significant relief to those who are having difficulty paying their federal loans.
Overall, a consolidation loan is an excellent way to combine several federal student loan payments and/or lessen those payments by extending the term. It also opens up the possibility of income-driven repayment plans or a graduate repayment plan if necessary.