Federal Loan Consolidation: Who Can Qualify and Why

There is a general belief that businesses and individuals who get financial aid through loans from their federal government have all the breaks that they need. But even when availing of these loans, it is possible to eventually find oneself under a crushing amount of debt. That is why federal loan consolidation programs have been introduced.

The availability of these programs has proven to be a lifesaver for many people whose attempts to maintain a low debt ratio has failed. The advantages of getting loan approval on federal terms can be lost when such important aspects as income or revenue do not prove to be as high as was hoped.

Often, the response is to take out further loans to cover other areas. But to properly deal with the weight so many federal loans can create, it is necessary to take extremely proactive steps. This is where consolidation can be so effective, buying out the balance on existing loans and replacing them with one simple-to-pay loan debt.

Federal vs Private Consolidation Programs

There are some differences between privately provided and federally provided programs. These largely relate to the interest rates that are charged, with private lenders seeking to make their profits by charging higher rates. The funds provided through federal loan consolidation, however, typically charge much lower rates.

Of course, getting loan approval tends to be much easier with federal programs, as long as the applicant ticks all of the necessary boxes. Qualifying is often quite straightforward with private loans, but approval rests on other matters. When seeking assistance from the federal government, all that is really needed is to prove a need for that assistance.

A crucial factor in any application for such aid, however, is that only federal loans can be covered. Privately secured loans cannot be part of any federally sponsored rescue loan.

Who Qualifies for Consolidation Loans

Qualifying for federal loan consolidation comes down to the type of loans that an individual or business owner is struggling with. Therefore, the first stage in seeking the green light on a consolidation program is having already been issued with federal funding of certain types. There are two categories: agriculture and business.

For farmers and others involved in the agricultural industry, there are four loans that can ensure qualification for a consolidation program, though getting loan approval may depend on the extent of financial hardship. The qualifying loans are FSA issued Farm Loans, Commodity Marketing Loans to bolster production and sales, Ownership Loans to alleviate economic difficulties, and Farm Storage Loans to finance the construction of grain silos and barns.

Businesses have a larger array of federal loans available to them, but there are five types that are covered by a consolidation program. These are any Small Business Loan (as per Section 7 of the Small Business Act), Disaster Loans from the Small Business Association, Indian Loans for Native Americans, Micro Loans for start-ups, and Physical Disaster Loans for businesses that have suffered physical (not just economic) damage in a disaster area.

Qualifying Criteria

It is easy to understand that federal loan consolidation exists to help businesses get out of financial hot water, and that it does not exist to provide a road out of debt for anyone. Various federal bodies offer excellent terms to applicants, so it is only those who have suffered real problems that can benefit from these programs – previously getting loan approval is not enough.

Managing Your Student Loans

According to a March 2012 study by the Federal Reserve Bank of New York, the average outstanding student loan balance per borrower is $23,300; a quarter of borrowers owe more than $28,000, and 0.45 percent of borrowers owe more than $200,000. If you continued on to medical, business, or law school, you are probably in the latter debt category with a six-figure student loan balance wondering how to tackle that monkey on your back. Students have a variety of options to choose from when deciding how to fund college expenses, but it is critical to understand the details and requirements of the loan taken out to pay for higher education. This article will describe the different types of student loans, explain the difference between subsidized and unsubsidized loans, and when to consolidate.

Subsidized versus Unsubsidized
First, let’s compare subsidized versus unsubsidized loans. Whenever you borrow money, you owe interest on the outstanding balance of your loan; when interest on a student loan begins to accrue depends on whether it is subsidized or unsubsidized. If you have a subsidized loan, the interest does not begin to accrue until after you have graduated and begin to repay the loan; whereas if you have an unsubsidized loan, the interest begins to accrue the moment the loan funds are disbursed. This important difference explains why someone students graduate and notice that their student loan balance is much higher than they had anticipated. Assume you only borrowed $20,000 at 5 percent to fund the first year of your 4-year undergraduate degree; if that loan was subsidized, the loan balance would still be $20,000 when you graduate, and the interest will begin to accrue at 5 percent once your grace period ends and repayment begins. However, if your loan was unsubsidized, your loan would have accrued interest of $1,000 at the end of your first year of college. If you did not pay that $1,000, it would get added to your initial $20,000 balance (known as capitalized interest or negative amortization) and this process would continue until you began making payments on the loan. Below are the two loans compared side by side:

Loan Balance (Subsidized versus Unsubsidized)
Year-End Subsidized Unsubsidized
Freshman $20,000 $20,000 x 1.05% = $21,000
Sophomore $20,000 $21,000 x 1.05% = $22,050
Junior $20,000 $22,050 x 1.05% = $23,152
Senior $20,000 $23,152 x 1.05% = $24,310 Balance Upon Graduation $20,000 $24,310

Perkins loans are subsidized and are for those students with exceptional financial need and can be used for both undergraduate and graduate degrees. Perkins loans are fixed at 5%, have a repayment period of up to 10 years, and amount is limited based on your undergraduate or graduate status.

Direct Stafford
Stafford loans are also for undergraduate, graduate, and professional students, but they can be either subsidized or unsubsidized. Direct Subsidized Loans are for students with financial need, and as long as you are in school at least part-time, within your grace period, or on deferment, you are not charged interest. Direct Unsubsidized Loans do not require demonstration of financial need and are available to all students.

PLUS Loans for Graduate and Professional Degree Students:
PLUS loans are for graduate and professional degree students and have a fixed interest rate of 7.9 percent. You must have a good credit history to be granted a PLUS loan, and you must have exhausted your eligibility for Direct Subsidized and Unsubsidized Stafford loans. PLUS Loans have a 4 percent fee charged on the loan amount, which is deducted from the loan proceeds. There are repayment plans that will allow you to amortize your loan between 10-25 years.