Government Debt Consolidation Loans and Payment Terms

Unlike private lenders, government debt consolidation loansgenerally depend on the type of debt you are looking to pay off and are not extended for personal use. The most common types of loans are available through the Higher Education Act (HEA). These loan programs mostly come from the Federal Family Education Loan (FFEL) and Direct Loan Programs.  Both types of loans, allow students who have debt from multiple lenders to consolidate the debt into one monthly payment. The major difference between student debt consolidation loans is the terms of repayment which are standard, graduated, extended or income contingent rate (ICR).  The following is a quick list to understand the differences of each payment type:

Standard Repayment Option

Standard Repayment Option is selected for you automatically, if you do not apply for another type of loan within 45 days of your loan approval. Under the standard repayment option, your government debt consolidation loan will be paid off over 5 to 10 years. You will have a single monthly payment which does not vary from year to year. For students who are not financially stable immediately upon graduation, this option can create an immediately burden. In order to have a "grace period," it is best to consider other options available. The standard option works best for students who secure a fairly high pay check immediately upon exiting college or who receive money through maturing trust funds or other sources.

Graduated Repayment Option

The Graduated Repayment Option offers students a low monthly payment at the beginning of their payment cycle. Each year or two, the monthly payment will increase. With this option, a student's payment ability should increase over time and works well for students in an entry level positions because they do not pay a high salary. This option can be more expensive than a standard repayment option because of higher rates and fees, but the repayment term will remain at 10 years.

Extended Repayment Option

If your debt is over $30,000, you may be eligible for an extended repayment option. The Extended Repayment Option allows you up to 25 years to repay your debt. Although you will face higher interest rates, your monthly payments will be lower. Additionally, it is important to keep in mind that the extended option will cost you significantly more money due to interest. However, it can be the only option available if you have a high degree of debt. When selecting this option, watch out for prepayment penalties. It is possible you will be able to pay this loan off sooner than you expected and do not want a penalty to be able to pay it off.

Income Contingent or Income Based Option

Income Contingent Options are repayment terms that are determined by an assessment of your financial stability. The major criteria will be your total family income and the total number of people in your family. If you make less than 150% of the poverty line in your area, then you do not have to make any payments. When you make more money, though, you could be paying up to 10% of your salary to your loans. This type of loan is best for those who are undergoing financial hardship after graduation. For example, a very weak job market could be a reason to seek an income based repayment option for your government debt consolidation loan.


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