Update: The application period for this program has now closed (on June 30, 2012). If you’re wondering how long it takes for the special consolidation loans to take effect, you should know that they are not processed immediately. First, your eligibility and loan amounts must be verified by your loan servicer(s). Only then will the consolidation loan be processed. This may take more than a few days. If you want to make a plan for paying off your student loans, use ReadyForZero. And to learn more details about the special direct consolidation loan program, continue reading below… Having trouble paying your student loans? Or just wish you could simplify your loan payments and get a lower interest rate? If so, then you’ll probably be very interested in the new Special Direct Consolidation Loan program initiated by the Obama administration. Below, we’ll describe how the program works – including how you can figure out if you are eligible and whether it’s worth it.
Why Was the Special Direct Consolidation Loan Program Created?
The purpose of the program is to give certain student loan borrowers an opportunity to combine all their student loans so that they can pay one payment each month instead of juggling multiple payments, and so they can count on a fixed interest rate.
Who is Eligible for Special Direct Consolidation Loans?
This part is a bit tricky. First it’s important to understand the holder of a loan is the one who owns it (the one you owe the money to), while the servicer of the loan is the one who is collecting the money from you. Often, the holder and servicer are different entities! Here’s how this works in practice – there are basically three types of loans:
1. Government-held “direct” loans. In this case, you have borrowed money directly from the government but your loan may be serviced by a private company on behalf of the government.
2. Commercially-held loans guaranteed by the government. These loans are made by private companies with private money, but they are guaranteed by the government through the Federal Family Education Loan (FFEL) program. Since they are backed by the government, there is little or no risk to the private company, and that allows the borrower to get more favorable terms on the loan, including lower interest rates. [President Obama recently restructured the FFEL program so that all new loans after June 30, 2010, would be direct loans]
3. Private student loans. Held and serviced by private companies, with no backing from the government.
Those are the three main categories of student loans. (If you’re not sure which type you have, try using the National Student Loan Data System, which allows you to look up all government-held and government-backed loans) In order to be eligible for the Special Direct Consolidation Loan program, you must have:
- At least one government-held “direct” loan, AND
- At least one commercially-held loan guaranteed by the government (FFEL)
If you meet those two criteria, then you are eligible for the Special Direct Consolidation Loan program. Keep reading to see how it works…
How Does the Special Direct Consolidation Loan Program work?
Keep in mind, even though you must have a government-held “direct” loan to be eligible, your loan(s) held by the government will not be affected by the program. The program will allow you to consolidate your commercially-held loan(s). Here’s how it works:
- Each commercially-held loan that you consolidate will retain its original payment terms.
- That means, if you consolidate more than one loan, each one may have different interest rates and each may have a different end-date.
- Your interest rate on each loan will be fixed at its current rate (minus 0.25%) and will remain at that interest rate for the life of the loan.
- You’ll never have to pay an interest rate higher than 8.25% even if you currently do.
- Once the special consolidation is complete, you will receive one bill each month and will make one payment.
Is There a Fee for Getting a Special Direct Consolidation Loan?
No. Hooray for easy answers! Okay, let’s move on to the most important question…
Is a Special Direct Consolidation Loan a Good Idea?
After all this, is this program worth it for you? That will depend upon your unique individual situation. For many people the answer will be “Yes.” Not only does the Special Consolidation Loan give you the convenience of one payment (instead of multiple payments), but another benefit is it gives you a fixed interest rate that is lower than your current one. Doing the special consolidation will not affect your credit score. And you can still make extra payments to get out of debt faster, if possible. However, as with all financial decisions, there are potential pros and cons, so you should thoroughly research how this would affect your unique individual situation and get advice from several sources before you decide to get a Special Consolidation Loan (see contact information below). We’ve heard from some people who say their total monthly payment is higher after this process, although that is not an intended outcome of the program. [Update: I just talked with a customer service rep at the Department of Education, and she said she's never heard of someone's monthly payments being higher. However, sometimes while the special consolidation loan is processing, it may look like your monthly payments will be higher due to a lag in the database being updated.] One potential downside is that the loans you consolidate will lose their grace period once the special consolidation is completed. If you’re counting on having a grace period, be cautious about applying for a special consolidation loan. According to this article, you might be able to apply with only your loans that have already passed their grace period and then add your other loans later (also see the discussion in the comments section of this blog post).
Do Special Direct Consolidation Loans Work with Income-Based Repayment (IBR)?
Yes! If you are doing Income-Based Repayment (IBR) already, you may continue to do that after getting the special consolidation loan. And any payments you made prior to the consolidation would still be counted toward your total repayment time. In other words, if you had made payments in IBR for the last 2 years, you would have 23 years remaining before your loan balance is forgiven. (Income-Based Repayment allows for loans to be forgiven after 25 years of making payments, regardless of how much remains at that time)
How Do You Apply for a Special Direct Consolidation Loan?
If you are eligible, the U.S. Department of Education will have one of its servicers contact you. These servicers include:
- FedLoan Servicing (PHEAA)
- Great Lakes Educational Loan Services, Inc.
- Sallie Mae
These servicers began contacting eligible borrowers on January 17, 2012, and will continue contacting them over the next few months. The window of eligibility ends June 30, 2012. If you think you are eligible and you do not hear from anyone by June, you may want to call your lender and/or the U.S. Department of Education to find out if you are in fact eligible. For questions related to this program, you can call the Department at 1-800-4-FED-AID (1-800-433-3243).
How can I check my special direct consolidation loan application status?
To check the status of your special consolidation loan, you can call the hotline mentioned above, or check in with your servicer to see if the application has been processed. After you submit your application, it may take some time for the servicer to verify your eligibility and the payoff amounts of your loans. Only when that is done will the old loans be paid off and the new servicing begin. In the meantime, you might continue to receive statements and/or bills from your original servicer. As always, if you have any questions, please post a comment below and we’ll do our best to answer it! This article is part of our Student Loan Debt Resource Center and Debt Consolidation Resource Center. If you’re looking for additional information about student loans or debt consolidation, be sure to pay a visit!