Deferment and Forbearance Options with Consolidation

You just lost your job and you’re calculating the previous forbearance time you’ve used on your loans. But wait—you consolidated. All forbearance and deferment time limits have been reset. You now have three years of general forbearance time available in 12-month increments on your consolidation loan.

It’s relatively easy to get forbearance on a consolidated loan—you

don’t have to call multiple servicers to get forbearance on each individual

loan. This saves you from possibly forgetting one loan and getting

a ding on your credit report, or worse, having your loan default

three to six months later. But in the spirit of maintaining your credit

scores, you still have to call your servicer to request forbearance and

wait to stop making payments until your forbearance has been

approved.

As I discussed in Chapter 2, you’ll want to save forbearance for when

you really need it. Once you’ve consolidated, unless you reconsolidate

with direct lending from another lender, request a new consolidation

because of addition loans or you won’t get any more forbearance time

added to your account.

Deferments have tougher rules for acceptance, but you can still get

one if you return to school or are active duty in the military and called

away to serve your country. You also get a brand-new, three-year term

for economic deferment. If you are working full-time and making less

than 150 percent of the poverty line in your state, can’t afford your payments,

or are in the Peace Corps, you can request an economic deferment

instead of forbearance. This way, if you have subsidized loans, the

government will pay the interest on the loan during your deferment

period.

Whether you utilize a deferment or forbearance, remember that your

loan amount will not decrease. In fact, you could end up owing thousands

more after a couple of years of forbearance because of accrued

interest. In order to negate this effect, try making small payments until

you get back on your feet.

What Is The Meaning Of Reconsolidating

Your eyes absolutely pop out of your head when you read over your

Loans chart from the National Student Loan Database and you realize

you consolidated and reconsolidated four times! What does this mean,

how did this happen, could you do it again if you so desired, and could

you get a better deal?

This is actually my situation. I consolidated my loans four different

times. The first time was for my initial undergraduate loans. The second

time was to include loans from when I returned to school to include the

remainder of my undergraduate degree. Then I did a mini-consolidation

of two loans right before an interest rate hike was expected in

order to fix the rate—this was before each federal student loan started

being issued at fixed interest rates. The final reconsolidation was right

after graduation for my first master’s to secure one of the consolidation

benefits before they ended in October 2007. I could still reconsolidate

one more time with direct loans, if the current program or a program

ten years from now with direct loans seems more beneficial for paying

off my loan faster.

Why might you want to reconsolidate?

If you decided to work for the government or a nonprofit business,

you could get on a plan where the rest of your loan would be forgiven

after 120 payments while working in a public service position for ten

years. It would also be a good option if you returned to school and

wanted one uniform payment. If you missed a loan and didn’t want to

lose out on benefits earned from a previous consolidation, this is not a

time to reconsolidate—at least until your benefit is earned.

There’s another situation where reconsolidation could be a good

idea: You consolidated before October 2007 with a consolidation benefit

of a 2 percent interest rate deduction after 36 on-time payments

and your new interest rate is secured for the life of your loan. You’d

rather have your consolidation loan with direct lending to make sure

your loan is never sold to another bank.

No matter what your situation is, weigh your options carefully and

reconsolidate when you are able to and when it makes sense for your

individual circumstances.

Stray Loans After Consolidation

All your loans are finally consolidated. Big sigh of relief—only one loan

payment to make. Time to pop the cork! But hold on to that little piece

of wood because you may need to put it back in the bottle for another

60 days. Why? One or more student loans were lost in the shuffle and

left out of the consolidation. How might this happen?

When you filled out your consolidation paperwork, you didn’t list

one or more of your loans. You may have forgotten about one or more

of your loans or didn’t know about them, or you compiled the list of

student loans from your paperwork for the loans you know about and

are making payments on, but forgot one of your bills.

The other way you could end up with one loan outside of consolidation

is through computer or human error. Double-check all of your

paperwork before consolidation. Also follow up with the new servicer

within a week or two of consolidating to make sure they show all of your

loans included in the process.

You may be able to catch the stray loan and get it into the consolidation

before the consolidation is complete. But if you don’t, you can

reconsolidate your loans, as discussed in the next section

How to Consolidate Your Loans

You’re ready to consolidate your loans, now you just have to complete

the process using the following steps:

1. Gather information on your loans. Grab the Personal Student

Loan chart you completed in Chapter 1. You will need to have the

following information on your open loans: the servicer, the interest

rate, and the loan status. Whether you consolidate with direct

lending or one of your current lenders, you’ll be asked for this

information online or over the phone for the following reasons:

• Servicer: The consolidator has to know who to contact to pay

off the old lender in order to transfer the loan.

• Interest rate: So your new interest rate can be calculated, your

new lender needs to know what all your old interest rates were.

Your consolidated loan interest rate is the weighted average of

your current loans.

• Loan status: You can’t consolidate a defaulted loan until you’ve

made payment arrangements with your guaranty agency and

followed the payment plan for at least three months. Unsubsidized

versus subsidized is also important for the loan status. If

you have both kinds of loans, you will have one consolidated

subsidized loan and one consolidated unsubsidized loan.

Finally, if your loans have already been consolidated, you can

reconsolidate only in two circumstances: if you have unconsolidated

loans to add into your consolidated loan, or if you are

reconsolidating into direct lending.

2. Fill out the forms. With direct lending, you can fill in all your loan

information online and e-sign the form. You can also print the

forms and mail them in. If you are consolidating with another

lender with whom you currently have federal loans, you should

contact them to ask whether applications are accepted online, by

mail, or by giving information to a representative over the phone.

Even if you are diligent, you still want to watch to make sure the

first payments post, especially if you filled out a direct debit form.

3. Don’t stop making payments on your old loans until you know

your consolidation is complete. This is the easiest way that good

intentions can go horribly wrong. You consolidate your loans to

make sure you never miss a payment, then you do miss a payment

while waiting for your loan to be consolidated. Wait until you have

some sort of written confirmation of your consolidation’s completion

and the date of your first payment before you stop making

payments on your previous loans.

4. Follow up, follow up, and follow up some more. Keep track of

your loan consolidation process by checking either online or making

a phone call every two or three weeks. If you forgot to sign

mailed-in forms or if there’s some other holdup, you want to know

right away what it is so you can fix it.