Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

How You Could Slash Your Student Loan Debt (If You Hurry)

Nobody wants to graduate from college and then pay 25% of their first job’s salary to student loan companies. But, with college tuition higher than it has ever been, that is the current reality for many young Americans. Fortunately, if you qualify, there is a little relief on the way.

The Obama administration is rolling out a series of reforms aimed at helping students better manage student loan debt. One of them, the Special Direct Consolidation Loan, is intended to simplify the student loan payment process and lower payments. The program consolidates certain federal student loans under a single servicer, making them easier to manage and lowering their interest rate. 

How Does It Work?

Do you have federal loans with at least two different companies? If so, you may be eligible to consolidate those loans into just one loan at a lower rate than you’re paying now. That means you’ll write just one check each month and pay less over the course of the loan. 

Loan servicers act as a middle man between the debtor and the creditor, which in this case is the government. This consolidation cuts out the middleman, allowing debtors to pay the government directly. So, instead of writing a half-dozen checks to loan servicers, qualified borrowers can write just one. 

The window of opportunity isn’t open forever, though. Debtors must apply for the program before June 30, 2012.

So how much can you save? Individuals that consolidate loans into a Special Direct Consolidation Loan get a 0.25% reduction on their current interest rate and another 0.25% reduction if they opt for direct debit payments. 

These consolidated loans cannot exceed 8.25%, so if you are currently stuck with a massive interest rate on a loan, the savings could be even greater than the aforementioned 0.5%. Plus, the rates are locked in for the duration of the loan, so you don’t have to worry about them changing in the future. 

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Who's Eligible?

You can participate in this program even if you've consolidated before, which wouldn't be the case with most traditional consolidation programs. 

So how can you get in? You must have the following:

  • At least one Direct Loan or Federal Family Education Loan (FFEL) held by the United States Department of Education that is current or less than 270 days delinquent
  • And at least one eligible commercially-held FFEL loan (For example, an FFEL loan held by a bank such as Wells Fargo or Chase.)

Only loans held by the U.S. Department of Education are eligible for the program. Loans not eligible for consolidation under the Special Consolidation Loan include: Direct Loans, private student loans, Perkins Loans, FFEL loans owned by the Department of Education and serviced by one of the Department’s servicers, and commercially-held FFEL loans that have an "in-school" deferment (meaning the borrower is allowed to put off payments while they're still in school) or are in default subject to a bankruptcy proceeding.

#-ad_banner_2-#If you are confused as to which type of loan you hold, you can call your loan provider. You can also log in to StudentLoans.gov from the link in the box that says "Check Special Direct Consolidation Eligibility." Once you sign into your loan account online, it will break down the different loans by type.

But all that effort may not be necessary, as the Department of Education website says that a representative from one of the department’s federal loan servicers -- including FedLoan Servicing, Great Lakes Educational Loan Servicing, Inc., Nelnet or Sallie Mae -- will contact you directly.

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Still, it is vital to apply for the program through StudentLoans.gov and not through LoanConsolidation, which offers Federal Direct Consolidation Loans. That may sound similar to the Special Direct Consolidation Loan deal, but they are not the same. In fact, consolidating through LoanConsolidation.ed.gov will make debtors ineligible for the Special Direct Consolidation Loan. 

If you are eligible, any time that has already been spent repaying a loan will not be lost in consolidation. Every loan that is consolidated under the Special Direct Consolidation Loan plan keeps its original repayment term. That means that if you have made payments on a 10-year loan for two years, your repayment term under the consolidation will be eight years. 

The Investing Answer: If you think you might be eligible, don't wait. Apply for the consolidation now -- or at least before the June deadline. If you qualify, this is a great money-saving program to lower your interest rate and simplify payments.