Signing up for those student loans probably seemed like a very good idea at the time. You had read all those statistics about how much more money you would earn over the course of your lifetime if you had a college degree. College was both fun and challenging. In fact, it might have been the best four or five years of your life. But then reality set in. Your degree in psychology, social science, philosophy, art history, European history or whatever hasn’t led to a great paying job. In fact, like many Millennials you’ve been forced to take a job outside your field of study and one that doesn’t pay very well. You had to to take out student loans to fund your degree and now here you are stuck with $25,000 in debts that you’ll be paying on for 10 or more years.
What kind of loans do you have?
Depending on when you started college, you might have an FFEL (Federal Family Education Loan) or a Direct Federal Loan or Perkins Loan. You probably know which type of loan you have because your loan servicer would have told you this. If you started school before 2008, you may have an FFEL loan. However, Congress eliminated those loans that year and replaced them with Direct Federal Loans.
If you have multiple loans
If you, like many graduates, have multiple loans there are two ways to get rid of them at the stroke of a pen. These are Direct Consolidation Loans and debt consolidation loans.
The pros of a Federal Direct Consolidation Loan
A Federal Direct Consolidation Loan could be your best bet because it has the lowest interest rate and would allow you to consolidate or combine several federal loans into one new one. If you’re having a problem meeting your monthly payments, are going crazy trying to make all of them and have exhausted your deferment and forbearance options, then a Direct Consolidation Loan might be for you. Get one of these loans and you would have only one lender – the US Department of Education – and just one payment to make a month. A Direct Consolidation Loan could also be a good option if you have several loans that have variable interest rates.
Flexible repayment options
Just as important, a Direct Consolidation Loan offers flexible repayment options as you could choose from a number of repayment plans, including Income-contingent Repayment and Income-based Repayment. Both these plans are designed to be very flexible to meet your changing needs. As an example of this, the Income-based Repayment Plan caps your payments at 15% of your discretionary income and will never be 10% more than the amount you would have to pay with a Standard Repayment Plan. However, to qualify for this plan, you would be required to demonstrate that you had a partial financial hardship.
Another benefit is that you can switch repayment plans whenever you like. On the other hand, if you select the Income-based Repayment Plan and would like to change at a later date, your only option would be to go to the Standard Plan.
The cons of a Direct Consolidation Loan
The cons or negatives of a Direct Consolidation Loan is first, its interest rate is no longer capped. Prior to July 1, 2013, the interest on one of these loans could not exceed 8.25%. Now, the rate is based on the weighted average interest rate of the loans you’re consolidating, rounded to the next nearest higher one-eighth of one percent. However, the interest rate for a Direct Consolidation Loan is fixed for the life of the loan so you would never have to worry about it increasing. Another downside of a Direct Consolidation Loan is that it will have a longer term. In fact, its term could be as long as 30 years. This means you will end up paying a great deal more interest than if you had stayed with your current loans.
Which loans can be consolidated?
Virtually all subsidized loans can be consolidated including Federal Stafford Loans, Direct Subsidized Loans, Subsidized Federal Consolidation Loans, Guaranteed Student Loans and Federal Insured Student Loans. The unsubsidized loans that can be consolidated include unsubsidized and non-subsidized Federal Stafford Loans, Direct Unsubsidized Loans, Unsubsidized Federal Consolidation Loans, Direct Unsubsidized Federal Loans, Federal PLUS loans (for parents or for graduate and professional students), Direct PLUS Consolidation loans, Federal Perkins Loans and many other types of loans (Click here for a complete list of loans that can be consolidated into a Federal Direct Consolidation Loan.)
Which loans are ineligible for consolidation?
If you have a loan from a state or private lender that wasn’t guaranteed by the federal government, you cannot include it in a loan consolidation. You also cannot consolidate Law Access Loans, Medical Assist Loans, Primary Care Loans and PLATO Loans.
How to apply for a Direct Consolidation Loan
If you have loans you would like to consolidate, you can apply online on the ED.gov website. If you have all Direct Loans, you could call 1-800-557-7392 and apply over the phone. Or you could request an application package by calling 1-800-557-7392, between 8AM and 8PM (EST) or by emailing firstname.lastname@example.org.
How to tell if a Direct Consolidation Loan Would Make Sense
If you have only a year or two of payments left on your loan, then a Direct Consolidation Loan would probably not make sense. Beyond this, there is an online calculator that could help you determine whether or not it would be better to stick with your current loans or consolidate.
A second alternative is to get a private debt consolidation loan from a bank, credit union or some other source. As a general rule credit unions offer loans at better interest rates than do banks. The reason for this is because they are owned by their members and are nonprofits. You can do comparison shopping for a debt consolidation loan at sites such as SimpleTuition.com and OvertureCorp.com where you can even get sample offers.
Another way to get money to pay off student loans is through a new form of lending called peer-to-peer lending. This is where you get funds directly from lenders and with no third-party bank or other financial institution involved. Two of the leading peer-to-peer lenders are Prosper.com and Lendingclub.com. If you shop this type of lending carefully you might be able to get an interest rate of 12.5% from investors.
Change to an income-based repayment plan
If you have a Standard Repayment Plan, you might be able to whittle down your monthly payments by changing to the Income-based Repayment Plan. In comparison with the Standard Repayment Plan,, your monthly payments would be capped at 10% or 15% of your discretionary income – depending on when you got the loan. Of course, there is a downside to this, which is that you will rack up more interest over a longer payback period. On a brighter note if you make 20 or 25 years of consecutive payments on your Income-based Repayment Plan, any balance that you have remaining would be forgiven.
Where to get help
National Debt Relief recently launched a program to help borrowers find relief from student loan debts. It provides a consultation service that will match your specific student loan situation, employment conditions and financial capabilities with the right debt elimination program. It will also help with the paperwork that will allow you to enter into such a program. National Debt Relief charges only a one-time time flat fee that will be placed in an escrow account. There is no maintenance fee or additional charges. They will only withdraw your payment once you’re satisfied with the paperwork and the debt relief program they steered you towards.