Taking Advantage of Federal Student Loan Consolidation

Federal student loan consolidation options are some of the only chances to modify your debt contract without actually facing negative consequences. The federal government encourages consolidation because it leads to a higher percentage of loans paid off on time. Since the government is not as concerned with profiting on the loans as much as simply getting repaid, the consolidation programs are a win-win option for borrower and lender.

How Federal Student Loan Consolidation Works

The process of consolidating federal debt is similar to any other debt consolidation process. Essentially, you take a new loan that is enough to pay the balances on each of your existing federal debts. The debts are recorded as settled with a zero balance, and the previous loan contracts are considered to be fulfilled. Then, you have only the one loan to pay off.

This means you will have one monthly payment. Most people who aim to consolidate want to not only streamline their payments but also capitalize on a lower interest rate. Consolidation can help reduce interest rates and monthly payments for student borrowers as well as the parents of students who have taken loans to pay the cost of education.

How to Qualify for Federal Student Loan Consolidation

Nearly any person who has a federal student loan debt can consolidate through federal options.

  • First, it is necessary to understand you do not need to have more than one loan as you would for most private consolidation programs. You can consolidate even a single debt to a lower payment if you wish. The option, however, is most commonly used by individuals and families who have multiple outstanding student loans. Instead of making several payments each month, you will have the option to completely consolidate into one payment.
  • Your loans must be in good standing. Then, each of your previous debts will be reported as paid off with zero balance to the credit agencies. This means you will not see any drop in credit and may even see a boost.
  • You may have the option to extend the life of the new loan up to 30 years.
  • Upon consolidating the debts, you will be eligible for further federal loan programs like FHA mortgages and FSA farm loans.

How Federal Student Loan Consolidation Differs from Private Consolidation

The main difference between federal and private consolidation is federal consolidation is not a response to a negative debt situation. Private consolidation is typically used as a means of settling debt for those who can no longer afford their payments. It is an option of last resort to avoid bankruptcy or default on multiple loans. Further, it is seen in a negative light by the credit bureaus who will receive reports stating you broke several loan contracts and consolidated your debt. On the other hand, federal consolidation is encouraged and can be a positive event for your credit. The government never assesses prepayment fees, reports only good activity to the credit bureaus, and generally encourages consolidation when it is an option for borrowers.


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