With the increasing cost of graduate programs, it is highly unlikely that a single scholarship, federal grant or loan program will be able to meet all the financing needs of a student. Even after excluding the scholarship amount received (if any) and the federal grants, a student or his parents need to take various federal and private loans to cover all the education expenses.

Often it becomes difficult to track the monthly repayment of the various loans, not to forget that the failure to repay a single installment leads to capitalization of interest, thereby increasing the principal amount for future accretions. To avoid these problems and to organize the multiple federal loans in a more efficient way, the Department of Education allows the parents/students to consolidate the loans under a single Direct Consolidation Loan, with a single rate of interest and monthly installment amount.

Calculation of interest rate:

The interest rate for the Direct Consolidation Loan is calculated average taking a weighted average of all the interest rates per loan amount and rounding it off to the 1/8 of a percent. The resultant interest rate is between the highest and the lowest rates in the loans considered. In any case, it is never greater than 8.25 percent.

Why should you consolidate the loans?

In addition to providing a better and organized way of managing the loans, Direct Loan Consolidation has two major benefits:

• It often leads to a reduction in the overall interest rate for the all the loans consolidated together.
• It also results in the extension of the repayment period (up to 30 years), something that may not be possible for every individual loan.

However, before bundling up the loans together, you should consult a financial advisor, for it may happen that the advantage that you are seeking out of consolidation is not really there. The main disadvantage may be that with the increase in the number of years for repayment, the interest accrued and paid towards the loan will be significantly higher than what you may have paid under normal circumstances.

The Cost of Consolidation

There are no costs for federal student loan consolidation. However, private loan consolidation is a different story altogether, which will discuss in detail in the subsequent post. As such, there is no cost of consolidation in case of federal loans, namely, the Perkins program, Direct Plus, Direct Stafford Loan etc.

Just before getting into the technicalities of a Federal student aid application, just mark the third word in the title, which is “apply”. Yes, it is always recommended that you “apply” for financial aid from the Department of Education in advance, much before you start the admission application to various colleges.

Officially, you can apply for federal college aid anytime between January 1, 2011 and June 30, 2012, but it is always advisable to apply as early as possible, so that you have your grant check ready when you begin college.

Research for information and apply for Federal Student Aid Pin

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