Consolidate Federal Student Loans

Many former students find themselves in the nightmarish position of having to pay off multiple loans by writing several checks every month to different lenders. Not only is it a hassle to remember, its also a constant drain on your checkbook. If funds are limited, the debt could push you towards default. 

The U.S. government will help you. The Department of Education allows you to consolidate federal student loans, both private and public, into a single monthly payment. That’s right, just one check. This is part of the department’s Direct Loan Program, as modified by the SAFRA Act of 2010.

Now, you can pay off you student loans at a fixed interest rate that is the average of the rates of your old loans. However, the interest rate is capped at 8.25 percent, which can be a considerable savings from high-interest loans. Also, you may qualify for additional deferment when you consolidate federal student loans. In any event, once you’ve paid for 25 years, the remaining balance is forgiven – you may have to pay taxes on the forgiven amount, however.

You can consolidate both subsidized and unsubsidized student loans. Subsidized loans are loans that do not require you to pay interest while in school.

There are several programs to consolidate federal student loans.One of them that is based on your income level is the Income-Based Repayment Plan (IBR). That means if you are of modest income and have a financial hardship, your monthly payments will be lower. Specifically, your payments will be capped at 15% of your discretionary income, which is the difference between your adjusted gross income and 150 percent of the poverty level for your family size and state. And here is another bonus if your spouse works: if you file separately, your spouse’s income will be excluded from your discretionary income calculation.

Another income based plan is the Income Contingent Repayment (ICR) Plan. In this plan, your payments rise and fall with your income and family size. Like the IBR, your loan is forgiven after you have made 25 years of payments. To qualify for the ICR, you must give the Internal Revenue Service permission to send your tax information to the Department of Education so that your adjusted gross income can be verified. This is a small price to pay for the flexibility afforded to you by the Income Contingent Repayment Plan.

Eric Bank, Freelance Writer

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