The Facts Regarding The Direct Consolidation Loan

A direct consolidation loan is a provision in which several federal student debts are combined into one. During repayment, the borrower receives one bill and makes a single payment in settlement. It is an initiative by the United States Department of Education aimed at simplifying payments by student borrowers. The offer started on 17th January 2012 and is set to end on 30th June 2012.

There are number of benefits that accrue from this arrangement. The interest rates are lower and fixed, there is a longer period of time within which to complete the repayment and it is possible to rebuild damaged credit by consolidating defaulted student debts. In-school deferments and forbearance are another helpful provision to many. There are a few disadvantages though. The extended period for repayment means that the total interest rate will be higher. Some cancellation (forgiveness) provisions are also lost.

The requirement for eligibility is that one should have a loan held by the Department that is being serviced by any of its servicers. It should be current, less than 270 days or delinquent. A Federal Family Education Loan (FFEL) in grace, forbearance, deferment or repayment is an alternative.

There are two types of the direct consolidation loan: the traditional type and the special type. The two have several similarities as well as differences between them. In the former type, all debts are considered together under new terms. The debts in the special type, on the other hand, are considered separately with each maintaining its original terms.

The repayment term for the traditional type gives students a longer period of time to repay. This means that the monthly payments are lower. The money paid back will, however, be much more in the long run. The interest rate charged is single and fixed and is based on the average of the interest rates being consolidated. In the special type, each debt is considered separately and repaid according to the original terms. Compared to the traditional type this rate is generally a bit lower. In both types borrowers are eligible for a 0.25% reduction in interest rates as a payment incentive if they use the automatic debit system of the servicer.

Application can be done online at the website of the department. One can also have the application for together with a promissory note mailed to them. Still, one can simply call the department and give the required information and the application will be done for them. Usually no fees are charged for application. Before committing to any of these arrangements it is important that one gathers enough information.

Repayment starts immediately the direct consolidation loan has been disbursed. One is expected to complete the first payment in not more than 60 days. The repayment period usually ranges between 10 and 30 years depending on the principal amount and the payment plan. Deferment and forbearance may be allowed for borrowers having trouble completing their payments.