Debt Consolidation

Government Help with Debt Consolidation

Posted on: March 24, 2010
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For people who need to get a better handle on debt payments, debt consolidation is a popular solution. Debt consolidation can lower the amount of monthly payments and/or the amount that will ultimately be paid, as well as provide a way to better ensure that payments are made on time.

The US government offers a debt consolidation program for federally guaranteed student loans once a student has graduated. This provides borrowers with an opportunity to bring all of their outstanding federal education loans together under a repayment plan designed to provide flexibility and lower payments to a single creditor, the U.S. Department of Education.

The government's consolidation program offers loans with fixed interest rates available with different terms over periods of 10, 15, 20 and 30 years. Interest on the consolidation loan is determined through a formula using the weighted average of the interest rates on the outstanding loans that a borrower wants to consolidate. Some plans include an income-contingent component and there are incentives for electronic debt payments.

Under a standard repayment plan, borrowers pay a fixed amount over the life of the loan until it is paid off, whereas a graduated repayment plan begins with lower payments that rise over time. The graduated loan gives the borrower time to find a job, get established and repay the loan at increasing levels, presumably as salary increases. The loan term depends on how much federal student loan debt the borrower is consolidating. Someone with $6,000 in debt would repay over 10 years, while someone with $60,000 in debt would repay over 30 years.

Borrowers can elect to extend the repayment period of the standard or graduated plan to further lower monthly payments. However, the longer it takes to repay the loan, the more it will ultimately cost the borrower due to the increased number of interest payments.

Under an income-contingent student loan consolidation plan, the amount of monthly payments is determined by the borrower's annual income, as well as other factors such as their loan balance and size of their family. Repayments can be for periods of up to 25 years.

Borrowers who are close to paying off their loans may not benefit enough from consolidating their federal student loan debt as opposed to more recent graduates who have higher balances and, possibly, multiple creditors and several loans with variable interest rates.

Federal student loans eligible for the government debt consolidation program include the various types of Stafford, Direct and PLUS loans in addition to many more.

If you do not have federal student loans but did get education loans from private institutions, there are debt consolidation programs offered through other sources, such as banks and credit unions. The reasons to look into such programs are that they offer the same potential benefits to cash-strapped recent graduates; more affordable monthly payments, a single lender and lower interest rates.