student loan consolidationStudent Loan Consolidation is the process of combining several smaller debts into one larger debt and one payment. Student Loan Consolidation is not refinancing, since the loan rates are not changed, merely locked in. Debt consolidation usually results in one monthly payment that is much lower than the combined amount of all of your previous smaller debt payments. It’s common for debt consolidation to lower total monthly debt service by half or more. Unlike private sector debt consolidation, a federal student loan consolidation does not incur any fees for the borrower. Private consolidators make money on subsidies from the federal government.

The current consolidation program permits students to consolidate once with a private lender, and reconsolidate again, but only with the Department of Education. Once the student has consolidated their loans, their interest rate will not change. The loans are set to a fixed rate based on the year they are consolidated.

At present, the average student is graduating with about $21,000 in debt. A default means you failed to make payments according to the terms of your promissory note, the contract you signed when you took out the loan. Your school, your loan guarantor, the financial institution that made or owns your loan, and the federal government all can take action to recover the money you owe.

You may be eligible for an income based repayment plan if you have federal loans through the Direct Loan program. Your payments will be contingent on your income and your debt load. Another relief program, an income-based repayment program, works much like the income based plan, but is more generous. You can make a higher income, and yet pay less per month. The terms of the two programs involve payments for up to 25 years. After that period, the remaining debt will be written-off. If you’re on one of these plans and you work in the public sector (teacher, public defender, etc.), your student debt is forgiven after 10 years.

According to a recent study by the National Consumer Law Center, private loans now account for one fourth of student borrowing. If you’ve been paying off more expensive, private student loans for several years, you may be able to find a lower interest rate by consolidating them. Interest rates are based on your FICO credit score. So, if your credit score is now higher than when you originally acquired your loan, you could save a substantial amount of money.

If you can’t maintain your student loan payments, the quicker you take action the better. There are severe penalties for defaulting on student loans. If you fail to make payments on federal loans for 270 days, the government can withhold a portion of your social security, and garnish your wages up to 15%. Your state and federal income tax refunds can intercepted and applied to your loan. You may not be allowed to renew state professional licenses. And, you may be sued for immediate payment of the full loan amount. In addition, you’ll likely have to pay collection charges up to 25%. It’s almost impossible to get a student loan discharged, even in bankruptcy.

Some private student loans may be placed in default if you’re 30 days late with your payment. If you’re having difficulty making your payments, there are programs that can help. An extended repayment plan can reduce your payments while extending your loan up to 30 years. Extending the life of your loan, however, will increase the total amount you repay. Interest will continue to increase on loans that are not federally subsidized. For instance, if you are $20,000 in debt with a standard 10-year repayment term and you extend that to a 20-year repayment period, you’ll be reducing your monthly bill by 34%, but your total interest will more than double. These are student loan consolidation steps you should take before you default on your loan. If your loan is already in default, you won’t qualify for either forbearance or deferment.

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