In order to help individuals get out of debt quicker, the government put into place programs to lend people money to help consolidate their loans. A consolidation loan is one where all the money that you owe is added up and one loan is provided. All that money then pays off the other smaller debts so that you only have one payment.
For example, if you had three credit cars with balances of $1,500, $2,746 and $5,652, you’d have a grand total of $9,898 of debt. Because it is three credit cards, that means you have interest payments on all three separate amounts and, more importantly, three separate payments. Therefore, you are paying more in interest each month and less on the principle which keeps you in debt longer.
Because the government is offer debt consolidation loans, these loans are known as “secure” debt. That means that the interest rate is typically much lower. So, the government pays off the debt and then you pay the government back; however, because the interest rate is lower and there is only one payment, an individual can make much larger payments so more of the principle is removed each month.
There are four types of government debt consolidation loan payback methods. They are:
- Standard: A general amount is determined for payment and that is paid each month consistently for the time of the loan.
- Extended: This increases the amount of time one has to pay back their loan. This means payments are smaller, but more interest is paid.
- Graduated: To begin with, there are smaller, lower monthly payment amounts and as time goes on, larger payments are expected.
- Income Contingent: The income is taken into consideration of the borrower to better create a proper repayment.
The most common example of the government offering a debt consolidation loan is when discussing student loans. Typically, a student will graduate with tens of thousands of student loans all spread out across multiple different loans. For example, they might have a Stafford Loan, a Perkins Loan as well as three private loans. So, instead of making five payments, the government would pay off all of those loans and then you’d make a single payment to the debt consolidation agency. This is an effective way of getting out of debt faster, not paying so much each month in debt payments, and ensuring your credit doesn’t become destroyed.