Perkins and Federal Direct Loan Consolidation for Lower Rates

If you have one or more federal student loans, including a direct loan or a Perkins loan, you are eligible to apply for a  federal direct consolidation loan  in order to decrease your monthly payments. While this may be a good option for you, there are also some potential pitfalls to be aware of

How Consolidation Works

When you consolidate your loans, the Department of Education pays off the balance of those loans and originates a new loan based on the total of the old ones. The interest on this consolidated loan is the weighted average of the interest rates of your original loans, not to exceed 8.25%. The original loans cease to exist, and you make one monthly payment on the consolidated loan.

Which Loans are Eligible

All federal student loans are eligible for a federal direct consolidation loan. This includes Perkins loans and direct loans, such as Stafford and PLUS loans. Even though a Perkins loan comes from your school rather than directly from the Department of Education, they are subsidized and funded by the government. They are therefore eligible for consolidation through the Department of Education. If you have a combination of direct loans and Perkins loans, you can consolidate them all together for one payment.

Benefits of Consolidation

If you have more than one federal student loan, you may find that consolidation works for you. Instead of paying several individual payments on loans that may have different interest rates, you can pay just one monthly bill on one loan with a fixed interest rate. You may also be able to extend your repayment period; normally, for an unconsolidated loan, it is ten years, but the term on a consolidated loan may be up to thirty years.

Potential Pitfalls of Consolidation

While consolidation may in fact be the best option for you, there are some things to beware of, especially with Perkins loans. When you consolidate, you will be making lower monthly payments, but you may be making more of those monthly payments; if your repayment period is extended from ten to twenty or thirty years, you will be paying more interest over a longer period of time. Another thing to keep in mind is that Perkins loans come with cancellation and forgiveness programs. For example, if you become a teacher, part of your Perkins loan will be canceled for each year you are employed full-time. However, since the Perkins loan will cease to exist after consolidation, those benefits also disappear. You cannot cancel or be forgiven on a consolidation loan.

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