Debt Consolidation

Debt consolidation is used to describe the debtor’s action of borrowing enough money from one creditor to payoff two or more debts of other creditors. This is usually done when the financial terms of the current outstanding debts like credit cards, lines of credit and auto loans are less favorable than current credit offers on the market.

Debt consolidation can be done by debtors with good credit history who are looking for market opportunity to lower their interest rates and monthly payments, simplifying their debt management at the same time by paying to one lender only. When debt consolidation is done before any financial troubles it brings not only the benefits of lower payments and interest rate savings but helps the debtor be entirely in a better financial position.

Most of the time debt consolidation is sought when a debtor faces larger monthly payments in total on various debts than they can afford. In other words, the debt situation is near or just out of control. In such cases doing debt consolidation without the help of a debt management service company is very difficult.

Each debtor’s situation is different and anyone seeking debt consolidation should take into consideration and calculate many variables in order to make informed decision – something that may not be possible for an average debtor who is trying to figure out how to make the next payments and is currently under stress.

Federal student loans can be consolidated by the U.S. Federal Government under the Higher Education Act (HEA) which provides for a loan consolidation under both, the Federal Family Education Loan (FFEL) Programs and the Direct Loan Program. Under both programs, the borrower’s loans are paid off and a new consolidation loan is created.

These programs simplify student loans repayment by combining several types of Federal education loans (that may have different terms and repayment schedules or may have been made by different lenders) into one new loan. The interest rate on the new loan may be lower than on one or more of the original loans. In addition, the monthly payment amount on a consolidation loan is usually lower and the time span to repay may be extended beyond what was offered in each of the original loans. Debt consolidation should result in more manageable debt and should make borrowers less prone to default.

Pay As You Earn Repayment Plan for Federal Student Loans

On December 21, 2012, the Department of Education announced the availability of the Pay As You Earn Repayment Plan for eligible Direct Loan Program borrowers.

If you have taken out federal student loans and your student loan debt is high relative to your income – you may qualify for the Pay As You Earn Repayment Plan.

The plan helps keep your monthly student loan payments affordable, and usually has the lowest monthly payment amount of the repayment plans that are based on your income.

Most Direct Consolidation Loans—except for Direct Consolidation Loans that repaid PLUS loans for parents—are eligible for Pay As You Earn.

Here is a list of federal loans eligible for Pay As You Earn Program:

  • Direct Subsidized Loans;
  • Direct Unsubsidized Loans;
  • Direct PLUS Loans made to graduate or professional students;
  • Direct Consolidation Loans that did not repay any PLUS loans that were made to parent borrowers.

Loans NOT eligible for repayment under Pay As You Earn Program are:

Loans that are currently in default; Direct PLUS Loans made to parents; Direct Consolidation Loans that repaid PLUS loans made to parents; Federal Family Education Loan (FFEL) Program loans.

Who may be eligible for Pay as You Earn ?

Pay As You Earn eligibility rules require that your are a new borrower  that have received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or Direct PLUS Loan for graduate or professional students on or after October 1, 2011, or you must have received a Direct Consolidation Loan based on an application that was received on or after October 1, 2011.

In addition, your federal student loan debt must be high relative to your income. You can use the U.S. Department of Education’s Pay As You Earn calculator to estimate whether you may qualify for the Pay As You Earn plan. The calculator looks at your income, family size, and state of residence to calculate your Pay As You Earn monthly payment amount. If that amount is lower than the monthly payment you would be required to pay on your eligible loans under a 10-year Standard Repayment Plan, then you are eligible to repay your loans under the Pay As You Earn plan.

How to Apply

If you are interested in applying for the Pay As You Earn Repayment Plan, here’s what you will need to do:

1) In the repayment plan selection section of your consolidation application, you will select the Income-Based Repayment (IBR) Plan.

2) After your Direct Consolidation Loan has been made, you will receive welcome materials from the federal loan servicer that will service your consolidation loan.

3) Your servicer’s welcome materials will instruct you to contact the servicer for an evaluation of your eligibility for the Pay As You Earn Repayment Plan.

Complete information about the Pay As You Earn Repayment Plan is available on the Pay As You Earn Repayment Plan page of the StudentAid.gov Web site. This information includes a detailed explanation of the Pay As You Earn Repayment Plan.