FEDERAL LOAN CONSOLIDATION’S DISADVANTAGES

2007-03-08 10:33:40

( Financial )



You can consolidate your college loans under the Federal Loan Consolidation Program offered by commercial lenders and by the Federal Government. College loan consolidation involves taking a new loan to pay off all your outstanding college loans. The new loan will have a new promissory note, guarantee agreement and repayment terms.

Federal loan consolidation offers students a way out of financial difficulty. It offers a way to manage burdensome college loans through extension of the repayment period with fixed interest rate which allows affordable amount of repayments. Although it has its benefits, federal loan consolidation also has its disadvantages. Better to be aware of these to help you in your decision to apply for one.

Higher Amounts of Interest Repayment

The longer repayment period costs you higher interest payment. On a monthly basis the repayments under consolidation are lower but in reality when you add up all the amounts until the maturity of the loan you will discover that it is higher compared to the original interest payment of your previous loans.

Unavailability of Privileges from the Original Loans

You might lose certain loan cancellation privileges on your original loans under the Federal Loan Consolidation Program. Perkins loans in particular have cancellation features available under teaching situations. You might lose this feature once you consolidate.

You might also lose the special interest paid deferment privileges available under your original loans. Federal loan consolidation has fewer deferment privileges. Subsidized Stafford loans can possibly avail of deferment on interest payment under consolidation.

Future Tax Liability

The Federal Direct Consolidation Program of the U.S. Department of Education has an income contingent loan repayment option which offers monthly repayment relative to the levels of income of student borrowers. The monthly payment increases as income increases for the maximum period of 25 years. The government will pay the loan balance if the borrower has not fully paid it after 25 years. A tax liability will be charged to the borrower for the balance subsidized by the government. The amount might be burdensome particularly at a time that your lifestyle expenses are also getting higher. To the average working person it might even affect retirement plans.


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