There are primarily two types of federal student loan programs in the United States. These include the Federal Family Education Loan Program or FFELP and the Federal Direct Student Loan Program (FDLP).
Both these programs include consolidation loans allowing students to consolidate various federal loans like Stafford Loans, Perkins Loans and PLUS loans into one single debt. Federal consolidation loans are managed by the Department of Education.
Refinancing or consolidating a student loan is an efficient debt management solution that can be advantageous in several ways. Federal consolidation loans are fixed rate loans that are offered at low interest rates resulting in reduced monthly repayments and longer payment term for the loan. Consolidated loans also help in improving the credit score of the student. These loans reduce the hassle of multiple payments to multiple lenders. Since federal consolidation loans do not charge any additional fees, they are more beneficial than private consolidation loans.
Every federal loan provides a grace period of 6-months after which the loan repayment starts. One should apply for a federal consolidation loan during the grace period so as to get the best deal. This is because the interest rates are lower during the grace period. Once the student gets employed, interest rates change depending on the monthly income.
One should never combine private loans like credit card debt and car loans with federal student loans while opting for federal consolidation loans. Private loans come at a higher interest rate and do not carry the same types of benefits as like a federal loan. Hence, consolidating a private loan with a federal loan would increase the overall interest on the loan.
After consolidation, if the student continues to pay the same monthly payment that he used to pay before consolidation, it would be easier to clear off the debt and increase savings.