Federal Student Loan Consolidation Laws
If you are one of the thousands of students graduating this year, you may have thought about consolidating your student loans. Since the average student has to take an entry level job his first year out of college, they may be attracted to the idea of a lower monthly payment, but this comes at a cost. Informing yourself on federal student loan consolidation laws could save you a lifetime of headaches.
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History
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The government has provided student loans since the end of World War II. Returning soldiers expected better treatment than their World War I counterparts. Congress not only wanted to make up for their mistakes with World War I veterans but prevent another Great Depression by re-employing the millions of veterans or sending them to college who would otherwise have nothing to do.
Which Loans Qualify
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Private student loans do not qualify for government consolidation, only Federal Direct Loans and loans in the Federal Family Education Loan program such as the subsidized and unsubsidized Stafford Loan and PLUS loan. In addition, you must not currently attend school or take more than six credit hours in order to consolidate your loans.
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HERA
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The Higher Education Reconciliation Act of 2005 is the only germane law that the vast majority of student loan holders will ever have to worry about. President George W. Bush signed this into law in 2006 as part of a "reduction" in government spending, but many criticized this bill as unnecessary because government spending increased in other areas.
Interest Rates and Repayment
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When you consolidate your federal student loans the net interest rate is calculated to give a rate proportional to the amount of each loan and their respective interest rates, with rates capped at 8.25 percent. For example, if you have a $1,000 Stafford Loan at 4 percent and a $1,000 Perkins Loan at 8 percent, you can expect a weighted average interest rate around 6 percent.
Benefits
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Many students choose to consolidate their loans after graduation to lower their monthly payments and reduce paperwork, especially if they have not found gainful employment, but this comes at a cost. Increasing the payment period from 10 to a maximum of 30 years costs much more in the long run than a normal payment plan, and once you choose to consolidate it cannot be undone.
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