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Your Options When it Comes to Consolidating Student Loans

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The subject of student loans has been in the news lately since the interest rates on Subsidized Stafford student loans will double from 3.4% to 6.8% if Congress fails to act. Subsidized Stafford loans are only available to students with financial need and the Government pays the interest on the loans as long as the loan recipients are in school. The July 1 interest rate increase would only affect new student loans.

Other types of student loans have different interest rates. An Unsubsidized Stafford loan currently carries an interest rate of 6.8%. PLUS loans, which are available for graduate and professional students as well as parents of undergraduates, has a current rate of 7.9%. A Perkins loan, where the school is the lender, has a 5% interest rate.

If you have several student loans and are having difficulty making your monthly payments, you are probably wondering what your options are to pay those loans. Read on to learn more about your options.

Discharging a Student Loan in Bankruptcy

You may already know that student loans are nearly impossible to discharge in bankruptcy. A debtor must prove to the court that it would be an undue financial hardship for the debtor to repay the student loan. To add to the difficulty, the various bankruptcy courts apply different formulas when determining whether an undue hardship exists. You would need to consult with a bankruptcy attorney in your area who is familiar with the particular formulas used in the bankruptcy court in your jurisdiction.

Several solutions addressing the difficulty of discharging student loans have been proposed. One solution is to allow the separate classification of student loan debt in Chapter 13 plans so that debtors could give preferential treatment to their student loan debt. In January of this year several senators re-introduced two pieces of legislation which would make it easier for student loan borrowers to discharge their private student loan debt in bankruptcy. However the legislation would not apply to federally-guaranteed student loans.

Direct Consolidation Loan

Your other option is to consolidate your student loans. This is especially useful if you are having trouble making your monthly payments, have exhausted your deferments and forbearances, or you want to avoid a default. A Direct Consolidation Loan is a federal loan made by the U.S. Department of Education that allows you to combine one or more federal student loans into one new loan. It’s important for you to consider the pros and cons of a loan consolidation.

The pros include the following:

  • You can combine your loans into one bill with one lender (Dept. of Education)
  • You can lower your monthly payment by having up to 30 years to repay
  • You can choose from multiple repayment plans with various terms and you can switch repayment plans at anytime
  • You can switch your variable interest rate loan to a fixed interest rate loan which will not exceed 8.25%
  • You can qualify for renewed deferment benefits if you have exhausted your deferment options in your current loan

But there are a few downsides as well:

  • You make more payments and pay more in interest by increasing the length of your repayment period
  • You may lose benefits offered with your original loan such as interest rate discounts and principal rebates

Most federal student loans are eligible for consolidation including Federal Stafford, PLUS, Federal Perkins, and Direct Loans. Private education loans are not eligible for consolidation.

Qualifying for a Direct Consolidation Loan

You are eligible to consolidate your loans after you graduate, leave school, or drop below half-time enrollment. You must have at least one Direct Loan or Federal Family Education Loan Program loan that is in a grace period or in repayment (including deferment or forbearance). You can consolidate a defaulted loan, but you must either make repayment arrangements on the loan with your loan servicer before consolidating or you must agree to repay your new consolidated loan under the Income-Contingent Repayment Plan or the Income-Based Repayment Plan.

Another Option If Your Student Loans Cannot Be Consolidated

If your student loans can’t be consolidated because you don’t qualify for the Direct Consolidation Loan or you can’t discharge your student loan in bankruptcy, sign up for free with our new website Start Fresh Today Plus. You will have access to our Marketplace where you can find help with your student loan debt.

Referenced from Start Fresh Today

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