You may have heard about a program called the Federal Direct Student Loan Program. Understanding how best to use Federal student loans need not be confusing. The Federal Department of Education helps students take out loans to pay for college or university. In doing so, loans are made in two-semester segments. So, if a student completes a four-year university program, they will have several separate loans. Once the student graduates the loans come due. Having multiple loans out at once can have a detrimental impact on credit – this at a time when good credit is most important.
One viable solution to this problem is to have the several small loans consolidated. This will have an instant positive impact on the credit score and make for easier debt servicing.
What is the Federal Direct Consolidation Loan Program?
The Federal Direct Consolidation Loan Program is one of the components of the Direct Loan Program. Direct consolidation loans made under the program to provide loans to borrowers who consolidate certain federal educational loans.
What is the Direct Loan Program?
The William D. Ford Federal Direct Loan Program is the largest federal student aid provision. Under this program, the U.S. Department of Education is the lender. There are four types of Direct Loans available to students:
- Direct Subsidized Loans: Made to eligible undergraduate students who demonstrate financial need. Direct Subsidized loans help cover the costs of higher education at a college or career school. Some of the education loans will fall into this category.
- Direct Unsubsidized Loans: Made to eligible undergraduate, graduate, and professional students, With Unsubsidized loans the student does not have to demonstrate financial need to be eligible. Some education loans will likely be unsubsidized.
- Direct PLUS Loans: Made to graduate or professional students and parents of dependent undergraduate students. Direct PLUS Loans help pay for education expenses not covered by other financial aid. Note that only graduate students or parents will incur this type of loan.
- Direct Consolidation Loans: Allow combining all eligible federal student loans into a single loan with a single loan servicer. This is possible at any time, but most students will want to wait until graduation to request this.
- Special Note on Consolidation: This arrangement is especially useful for education funds provided by numerous lenders.
How Does Consolidation of Federal Student Loans Help?
Six months after a student graduates from college student loans mature. At this point, payments come due. The student will likely have several small loans to service. Because they are servicing multiple loans, the amount due each month is often high.
Think of it like this. If a person has several credit cards, they will have several payments to make each month. By consolidating all the credit cards into a single loan, better terms and lower payments are possible.
Student loan payments are no different. Reduced payment amounts are possible once loan consolidation occurs. This makes for easier servicing of the loans. Note loan consolidation can only occur according to the type of loan. If a student graduates with five subsidized loans and three unsubsidized loans, the student can still consolidate. Rather than eight loans, there will be two: One for the consolidated subsidized loans and one for the consolidated unsubsidized loans. This will still have a positive effect on both credit and payment reduction. Certainly, two loans are easier to manage than eight.