Government Student Loan Consolidation

In a government student loan consolidation several federally guaranteed student loans are combined into one loan. Most student loan borrowers accumulate a number of different loans throughout their college careers and combining them often makes sense after a person finishes his or her studies and is getting ready to start a job and begin paying off student debt. In this way the student can have just one loan and one payment to deal with each month, and the one

payment will probably be lower than the total payments of the separate loans.

The Lender Must Consolidate Government Backed Student Loans

If the borrower qualifies for a consolidation the lender must grant one. This is not the case with private student loans where the lender can simply deny a consolidation loan for any reason or no reason. Another benefit of a government student loan consolidation is that the interest rate is fixed by law and it will be the weighted average of the rates on the individual loans. Again, this a difference compared to private loans where the lender can raise the interest rate as high as they think they can get away with.

Other Considerations Regarding Government Student Loan Consolidation

Another reason for consolidating your government backed student loans might be the case where a borrower has had financial difficulty, has not made any payments for some time and is approaching default (for federally guaranteed loans it takes 9 months or 270 days of non-payment to go into default). In that case the borrower might execute a consolidation of his or her federal student loans and this would essentially reset the default clock to zero and help keep the borrower from defaulting. Although more and more student loan borrowers are letting their loans default, this is something you want to avoid because of the huge penalties and collection fees, not to mention the harassment you will receive from collection agencies. Another consideration is that if you have any Perkins loans, which are granted to students with exceptional financial need, you need to be sure that you are not losing certain rights that go along with these types of loans if you do a loan consolidation. These rights even include some provisions for cancelling the loan debt in certain circumstances, so be sure you discuss this with your loan officer before doing your consolidation loan.

Rights To Change Repayment Plans and To Deferment or Forbearance

If a borrower loses a job or becomes severely ill such that he or she cannot make normal payments on the government student loan consolidation, there are other options available to avoid default. It is possible in those cases to qualify for a deferment and put off loan payments for a while to buy some time in order to get one’s financial house in order. Of course accrued interest on the loan will increase unless the loan is subsidized, but that is better than going into default. Forbearance is another way to delay loan payments for a time. Borrowers should also be aware that if they execute a government student loan consolidation they have the right each year to change their repayment plan to one that creates very low monthly payments based on their actual income. Once again, borrowers need to know the options available to them in order to avoid default. Defaulting on student loans can literally ruin a person’s life. Even if a student borrower declares bankruptcy the debt will not be dismissed, and the collection agency can garnish wages and other funds that are meant for the borrower such as disability payments and even social security. Lastly a borrower needs to know that if a government student loan consolidation is executed it cannot be done a second time. So know your rights and your options before doing this.