Debt Consolidation of Student Loans

Students who do not qualify for a hardship, Public Student Loan Forgiveness (PSLF), or Teacher Student Loan Forgiveness may still have remedies to handle their debt situation. One such remedy is consolidating all of student debts into one loan. Many students obtain multiple loans in order to pay for their education.

The main idea behind consolidation is that the debtor will only manage one loan, make one regular payment, and have one overall interest fee.

Here is a discussion of the pros and cons of student loan debt settlement. The rules and issues for consolidating federal debts are given first. The rules and issues for private debts are given second.

Consolidation of federal student loans

The laws that govern federal student loan are the Reauthorization of the Higher Education Act, enacted in 1992, and the William D Ford Direct Loan Consolidation Program, enacted in 2010. The Ford Act is also known as the Obama Student Loan Forgiveness program.

Pros of Consolidating Student Loans

1. Simplicity. It’s easier to keep track of one larger loan than a lot of smaller loans.
2. Better repayment plans. Many student loans were entered into at high interest rates and at a time when the debtor didn’t know if he/she was going to have a job or what the income from that job would be. There are different types of repayment plans that factor in different issues that are usually more manageable for the borrower. Here are the main types of repayment plans:
   1. Standard repayment. The debtor pays a fixed sum each month for a specific time such as 20 years. The key factors are the amount of the loan, the length of the loan, and the interest rate.
   2. Graduate repayment. Payments start out low and then increase. The thinking here is that students will earn more money each year as they acquire more career experience.
   3. Income Contingent (ICR repayment). The loans factor in the borrower’s family size, the amount of the loan still due, the debtor’s income, and the interest rate.
   4. Income Based (IBR). Here the repayment plan is based on the debtor’s family size and income. The amount due on the loan and the interest rate are not criteria in the amount of the monthly payment. Basically, the borrower pays a percentage, such as 15%, of discretionary income to pay off the loans.
   5. Pay as You Earn (PAYE). This is similar to the Income Based plan but payments, if the debtor qualifies, are usually about 10% instead of 15%
3. More flexibility. Consolidation plans usually allow a change if the debtor loses are job or part or their income.
4. Possible loan forgiveness. Debt consolidation of federal loans may have debt forgiveness provisions. Basically, debtors who pay their monthly payments for the preset number of years may still have a balance due at the end of that preset limit, ex. 25 years. The balance due may be forgiven if all other conditions of repayment have been met after the 25 years of payments.
5. Interest adjustments. For IBR repayments, some of the interest may be forgiven during the first three years.
6. PSLF eligibility. Approved repayment plans are eligible for the Public Service Loan Forgiveness program.
7. A fresh start. Once the debts are consolidated, the debtor gets a fresh start. This means the debts are taken out of default.

Cons of Consolidation

Consolidation isn’t necessarily right for every debtor. Consolidation may extend the length of the loan. For many debtors, paying off the loan as fast as possible is the best course. The older loans may have had some terms that were more beneficial to the debtor. Debtors should review each aspect of their old loans before considering consolidation.

Additional Considerations

One key factor to consider in consolidations is that the interest rates will normally change to arrive at a weighted average. For example, if a debtor had two loans each for $50,000 but the first loan was at 3% and the second loan was at 7%, the new $100,000 loan will have a 5% interest rate.

It takes a few months to complete all the paperwork and get the necessary approvals.

Only federal loans are eligible. These include Direct Loans (Subsidized and Unsubsidized), Federal Perkins Loans, Stafford Loans (Subsidized and Unsubsidized), Plus Loans, Federal Nursing Loans, Health Education Assistance Loans and Federal Family Education Loans

Debtors can apply for consolidate after they have graduated or left school. The loans should already be in some sort of repayment plan.

Private Student Loans

Students can also consider consolidating private loans but the rules and benefits are different. Consolidation of a private loan is done through a private lender. A private lender is generally not going to offer most of the benefits of consolidating federal loans such as debt or interest forgiveness. Most private consolidations are done if the overall interest rate will be lower, because of a better economy, than when the private loans were created.

Private lenders may also be willing to consolidate federal student loans in addition to the private student. Before considering consolidating federal loans, the borrower should explore ALL the benefits of consolidate federal loans or they may LOSE many benefits.

Still have questions?

If you live in New London County and want help with your student loan debt, call our office now at 860-449-1510 – we’d love to help you!