How to Take Advantage of Federal Student Loan Consolidation

Federal student loan consolidation is away for students to get their student loan debt under control. It will not only help students save money in the long run, but it will reduce the overall amount of the monthly payment, making it easier for them to manage. Federal student loan consolidation programs will pay off most student loans and combine the amounts into one loan, with one interest rate, and one monthly payment.

Visit the Federal Direct Loans Website

This website will provide students and graduates with the application they need to fill out in order to consolidate their loans. It can be filed online, too. For those who fill out the application online, it is best to also have an online account with your current loan servicers to be able to record the information directly from the loan servicer to the direct loan application. After the application is complete, choose a repayment plan. The repayment plan can be income based, which will take a look at your tax return each year and determine a payment amount, graduated, which will start with small payments and move to higher payments after five years, or extended, which will base the payment on 25 years of repayment instead of 20.

Lower Monthly Payments

Consolidation will combine all the smaller loans with multiple interest rates into one larger loan, with an average interest rate. Where a student has $420 a month in student loan payments with her current loan servicer, she may see a reduction to $140 a month in student loan payments after using a consolidation program with income based repayment. The reduced monthly payment is much easier to mange than the other, increasing the likelihood and the ability to pay.

Postpone Monthly Payments if Necessary

Like with the other student loan programs, it is still possible to place loan payments in forbearance or deferment when necessary. The federal government understands sometimes life gets in the way of someone's ability to pay. To save the credit score of a borrower, postponing the payments are allowed. Just as with any other loan program, however, there must be extenuating circumstances and there are guidelines which must be followed.

Balance Erased after 25 years

If after making payments on a regular schedule for 25 years, not including deferment or forbearance time, there is still a balance on the loans, the balance is forgiven. The debt forgiven may be presented in the form of a 1099 as miscellaneous income for tax purposes. This means the IRS has the right to tax the amount written off as income. As a result, the student may have a higher tax liability for that year, but this can be handled through saving money throughout the year or making a payment arrangement with the IRS.


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