Types of Federal Student Loan Consolidation

Federal student loans

Federal student loans are loans extended to students in the United States with payback guarantee provided by the federal government. By the time a student completes education and enters a career, he or she has usually taken a number of loans.

When these different federal loans are added up into a single loan, the interest rate on the consolidated loan is less than that on the individual loans and monthly repayments too are lower. The federal government itself offers student loan consolidation plans designed to meet the different needs of different students.

• Standard Student Loan Consolidation: This plan is suitable for students who can pay a fixed amount every month for a maximum period of 10 years. If the consolidated loan is of a big amount, the interest rate is not a mater of serious consequence. You can pay back the entire consolidated loan in less than 10 years if possible and you will not have to pay prepayment penalty. But the entire loan must be cleared within 10 years.
• Extended Payment Plan: This is same as the Standard Student Loan Consolidation plan described above, except that the repayment period varies between 15 and 30 years. The bigger the loan, longer is the repayment period allowed.
• Graduated Payment Plan: This plan is preferred by students still in school. Repayment starts only after the student has graduated and taken up a job. The payment amount starts low and increases every two years. The repayment period allowed under this period is 15-30 years depending on the size of the consolidated loan and the earning capacity of the borrower (the principle assumed here is that salary will increase with time, hence the borrower can pay higher installments as his or career progresses).
• Income Contingent Payment Plan: This is the most complicated of the four plans. It takes into account the borrower’s income level over a period of years in addition to the family’s gross income, assets, mortgages, and such criteria.

US Federal Government

The US federal government wants to make repayment of student loans easy on the borrower, which is why it has formulated the above four consolidation plans. Which plan is suitable for you, depends on your own needs and preferences.

If you are into a high-paying profession, perhaps the standard plan is best, since it involves a fixed monthly payment for a maximum of 10 years. If you take up a career in which the starting remuneration is somewhat low but will increase as you gain experience, the graduated payment is perhaps the one for you. However, the most popular plans seen thus far are: the extended payment plan, and the graduated payment plan.