FEDERAL DIRECT CONSOLIDATION LOAN: INCOME CONTINGENT OPTION

2007-03-08 10:33:40

( Financial )



The federal government offers a federal direct consolidation loan to students who have availed of college loans. It offers an income contingent repayment option to students who are currently experiencing a burdensome debt on their college loans. All loans are consolidated into a new loan wherein the amount of monthly repayments is computed based on the income level of borrowers. Students with low income are assigned lower monthly repayments. However, monthly repayments increase as student’s income increases.

The income contingent repayment option under federal direct consolidation loan has a maximum repayment term of twenty-five years. However, the government assumes loan payment when the loan is not paid after this period. The borrower will be taxed by the government for assuming the payments of his loan under direct loan consolidation. The computation of tax liability covers the amount paid by the federal government.

The income contingent option under federal direct consolidation loan is the only repayment option that cannot be availed from banks and other lenders. It can only be availed directly from the federal government.

The longer repayment term results to a higher amount of interest payment by borrowers making it more costly particularly if they missed interest payments. Thus, the income contingent option is recommended only for those students who have no other means of paying off their college loans.

There are other repayment options offered under federal direct consolidation loan which offer shorter repayment options. Standard the year repayment period, extended years plan and graduated repayment arrangement. The latter involves smaller repayments at the start of the repayment term and increases on a specified period until its maturity.

Student borrowers should make sure that they can meet loan obligations whatever repayment options they choose. It is important to analyze their repayment capacity before deciding what repayment options to apply.


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