The health and economic emergency of COVID-19 has caused temporary financial hardship for many Americans, making it difficult for many federal student loan borrowers to keep up with their monthly payments. In March, Congress brought much-needed relief to most of these borrowers by putting their accounts into automatic emergency forbearance and suspending accrued interest on these loans for six months under Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act.
However, some federal student loans were not eligible for this support, including older Perkins loans or certain federal family education loans, known as FFELs, held by commercial lenders. If you have any of these types of loans, you should know that you can access emergency benefits by consolidating your student loans into a federal direct consolidation loan.
A Federal Consolidation Loan is a new loan that allows you to consolidate multiple federal student loans into one, but it does not include any private student loans you may have. Student and parent borrowers can consolidate their loans, but note that a parent cannot consolidate a Parent PLUS loan with their student’s federal loans. Consolidation loans are offered free of charge and the application only takes about 30 minutes.
In the short term, a federal consolidation loan can help you access temporary emergency benefits of 0% interest and automatic forbearance. In the long run, this can make it easier for you to manage your federal student loan debt because you’ll have one monthly payment and one student loan manager. Your monthly payment may be less because it extends your loan repayment period, but it can mean that you will pay more over the life of the loan because of the interest.
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Consolidation has its benefits, but it might not be the right step for everyone because every situation is different. If you are considering a consolidation loan, you want to be sure that it is the right decision for your situation, both now and in the future, before you go through the paperwork. Here are five things you should consider about student loan consolidation during COVID-19:
- A federal direct consolidation loan will change your interest rate.
- Unpaid student loan interest will be capitalized, increasing the amount you owe.
- You could lose access to some specific loan benefits.
- You could erase the progress made towards the forgiveness of public service loans.
- You have other options.
A Federal Direct Consolidation Loan Will Change Your Interest Rate
If you currently have multiple interest rates on your federal student loans and you have variable rate loans, the consolidation will establish a fixed interest rate and you will no longer be subject to interest rate fluctuations on the interest rate loans. variable.
The fixed rate is based on the weighted average of the interest rates of the loans being consolidated, rounded to the nearest 1/8 of a percent, which could increase your costs.
To help you determine the cost of consolidating your federal student loans and to compare it with other options available to you, consider using an online student loan consolidation calculator.
You should also consider that if some of your student loans have a much higher interest rate, you will also lose the ability to target additional payments towards the higher rate loans because you will only have one rate. of interest.
If you can pay more than what’s owed each month, paying off your higher rate loans can usually save you money because they earn more interest than a lower rate loan. So, before you proceed with the consolidation, consider whether your current financial situation is temporary and if you might want to use this strategy to pay off more expensive loans first in the future.
Unpaid interest on student loans will be capitalized, increasing the amount you owe
When you take out a new consolidation loan, the accrued unpaid interest is capitalized, that is, it becomes part of the principal balance of your new loan. The problem with this is that once it’s part of your new balance, you’ll pay interest until you pay off the loan, which means you’ll pay more over time.
You can avoid this problem by paying the unpaid interest on your loans before proceeding with the consolidation. However, if you cannot afford to make that payment first, you should be aware of it when considering consolidating your loans.
You could lose access to some specific loan benefits
FFEL and Perkins student loans both have advantages that you will lose if you consolidate.
If you have FFEL loans, your loan holder may offer automatic payment discounts or reduced principal or interest rates if you meet certain conditions. Before consolidating, check with your loan holder to see if there are any specific benefits associated with your loan that you could lose.
Likewise, Perkins student loan borrowers should consider the loss of benefits. For example, interest does not accrue when a Perkins loan is placed on a deferral basis, but when a Perkins loan is consolidated, it is treated as an unsubsidized loan. Check with your loan holder about the potential loss of benefits before you consolidate.
You Could Erase Progress Toward Public Service Loan Forgiveness
Many borrowers have more than one type of federal student loan, so you can have a mix of FFEL, Perkins, and Direct loans. If you have direct loans and you’ve worked on Civil Service Loan forgiveness – a program whereby the remaining balance is returned after you’ve made 120 qualifying monthly payments – the consolidation will restart the clock. This means that none of your previous payments will count towards the PSLF and you will start over with the consolidation loan.
This could represent a significant loss of profits, so be sure to check with your loan officer before proceeding with the consolidation. Perkins student loans also have loan forgiveness options that you may lose access to when consolidating.
You have other options
While there are certainly benefits to consolidating your student loans, if your primary goal is to get temporary relief from your monthly loan payments, check with your student loan manager to consider other options first. .
With FFEL and Perkins loans, you can suspend your monthly payments for 90 days by requesting a forbearance. Before deciding that this is the right step for you and moving forward, be aware that interest may accumulate on your loan while you are in forbearance and can be capitalized when you are out. ‘abstention.
FFEL loan borrowers may also be eligible for the Income-Based Repayment Plan, or IBR, which could reduce monthly student loan payments. This type of repayment plan is based on your current salary and could be as low as zero dollars per month if your income is low enough.