In 1992, the program for federal student loan consolidation was created. The act was created under George H.W. Bush as part of the Higher Education Act. The program underwent sweeping changes in 2010 under Obama and has been referred to the Obama Student Loan Forgiveness program. The legislation allows for the cancellation of debt in certain cases and gives help with existing balances.
There are many factors that would lead a person to consider consolidating their student loans under a federally offered program. Issues like the unsteady job market and disabilities can often affect a person’s ability to pay back their loans, making a merger an attractive choice. There exist both pros and cons to this option, and we wish to cover these within the scope of this article.
Pros to Restructuring Student Loans
- Consolidation Simplifies Repayment Process: Instead of having multiple accounts with different lenders and varying interest rates, borrowers will have just one account with one lender and percentage. This will make tracking due dates and balance information easier, ensuring customers will be able to pay on time.
- Payments Are Flexible: Monthly remittances can be adjusted according to changes in life circumstances, and if the government deems the person unable to pay, their amount due can go to as low as $0.00 per month. This is not considered a deferment but is deemed the actual dollar amount required. The mandatory monthly total can also change to reflect the size of the client’s family.
- Unpaid Balances Can Be Cancelled: An appealing part of refinancing using this method is that customers are forgiven any monies still outstanding at the end of their term. This is a strong departure from the traditional methods of consolidation. Many people still have large amounts due on their conventional loans after paying on them for a significant length of time. This can make getting a home difficult as well as starting a family. The money written off with a government loan can potentially be a large sum.
- A Fresh Start: There is a certain mindset that occurs when a person has been in default and has a negative credit rating. They often leave off paying, as they perceive there is no longer any reason to try to improve their situation. A new beginning and a clean slate can give people the inspiration to begin working to pay down their bill again.
- Older Arrangements May Qualify: Some older loan types are included under the REPAYE system, meaning that these also can be eligible for refinance. The original PAYE program only worked with financing taken out later than 2007 until after a revision was made to the regulations.
Cons to Loan Reconstruction
- Interest Rate Increases: Unlike with a private financial institution, a person’s rate of interest is not going to decrease when seeking to join their accounts into one. The government takes the previous amount charged and will add around 0.125%.
- Term Lengths May Be Longer: The number of years it will take to repay is dependent on the total monies requested. A scale exists with smaller sums from less than $7,500 to $19,999, taking from 10 to 15 years to complete. Monetary values of $20,000 to over $60,000 can be paid from between 20 and 30 years.This means that a person may end up paying on their balance over a longer period of time by choosing this method.
- It May Decrease the Ability to Pay Off: The ultimate goal is to pay the original balance in full, and this may be hindered if the interest rate and number of years are both increased.