The William D. Ford Federal Direct Loan Program has helped millions of college students pay for their education. These low-interest-rate loans are not backed by private banks. Instead, they are administered by the U.S. Department of Education and guaranteed by the federal government.
The Direct Loan program was created when Congress passed The Higher Education Act of 1965. This legislation did not just make attending school more achievable for low-income students; it also laid out specific guidelines and regulations these loans must follow. Throughout the years, the act has been modified to reflect the current economic climate and changing trends in education. Here is a quick overview of what you need to know before you begin the federal student loan consolidation process:
What You Can Consolidate:
There are a variety of direct loans a student or his parents may have taken out. Subsidized direct loans are based on a student’s financial need. These loans do not charge interest while the student is in school (at least part time) or during the grace or deferment period. Unsubsidized direct loans are not based on financial hardship and most students are eligible. However, interest begins accruing as soon as the first check is disbursed. PLUS parent loans are also included in the direct loan program. The loans are unsubsidized, and interest is charged immediately.
You will be eligible to consolidate all of your direct federal loans together. However, you will only be able to consolidate loans that you took out. If you mother received a PLUS loan, she will not be able to transfer that loan over to you. She will have to go through her own consolidation process.
Federal direct loans cannot be combined with any other student loans that are not guaranteed by the federal government. This includes any state or private student loans that you may have taken out. Most consolidation companies will also exclude PLATO, Primary Care, Medical Assist, and Law Access loans from the process.
Consolidating Rules and Regulations
The federal government provides oversight for the federal consolidation process. The government decides the maximum fixed interest rate, forgiveness programs, and even fees. It does not matter which consolidation company you use; each must follow these regulations. Let’s take a look at what you can expect:
- When to Consolidate – Companies will consolidate your direct loans if they are in the following status: grace, deferment, default, or repayment. Yes, the government will allow you to consolidate loans that are in default. However, you will need to agree to begin making satisfactory payments in order to be eligible for consolidation. If you are currently attending college less than half-time, you may be allowed to consolidate your direct loans.
- Fixed Interest Rate – Typically, a company will look at the interest rates for all of your federal loans. They will average these rates together and round up by 0.125% to come up with a new blended rate. However, the new blended rate may not be the actual rate you receive. The government has set 8.25% as the maximum fixed interest rate a company can charge.
- Waived Fees – Lenders are not allowed to charge you an application fee to consolidate your federal loans. Private lenders can charge these fees to process all of the paperwork needed to set up your account. Lenders are also unable to charge prepayment penalties if you decide to pay your loan off early. However, you are required to clearly state to the lender that you are prepaying your loan balance. Otherwise, the lender can put that extra money toward your next monthly installment.
- Forgiveness Programs – The federal government offers loan-forgiveness programs if you are employed in certain professions. The Teacher Forgiveness Program allows you to cancel a portion of your loan if you are a full-time teacher in a low-income school with at least five years of service. The Public Service Forgiveness Program will cancel a portion of your loan if you are employed in certain public service agencies and have made 120 payments on your federal loan. It is extremely important that you speak with your consolidation company if you are employed in these professions. Make sure that by consolidating, you do not lose portions of these generous benefits.