Government Debt Consolidation Loans: Payment Terms Explained

Government debt consolidation loans are loans that simplify the student loan debt repayment process by combining all of your existing government-issued student loans into one. This allows you to get lower monthly payments and reduce paperwork. However, since you will still owe the same amount of money as before, it will take you longer to pay back what you owe. You can choose from several different repayment options. Each one has its own advantages and downsides. For best results, consider your own short-term and long-term financial situations and figure out which option works best for you.

Basic Consolidation Loan Requirements

In order to qualify for a government debt consolidation loan, you must meet the following requirements:

  • Qualifying Loans—Federal direct loans and Federal Family Education Loans (FEELs) are eligible for consolidation. Direct loans include direct subsidized, unsubsidized and PLUS loans, while FEELs include subsidized and unsubsidized Stafford loans and federal PLUS loans. Direct and FEEL consolidated loans are eligible so long as they are consolidated with a loan of a different type. If you have any private loans, they will have to be consolidated separately through a private lender.
  • Debt Status—At least one of the qualifying loans you want to consolidate has to be in grace, repayment, deferment or default status.
  • Enrollment Status—If you are enrolled in a college or university, you cannot consolidate the loans you are currently using to pay for your education. 

Standard Payment Plan

This is the default repayment plan. If you do not apply for any other type of repayment plan within 45 days of the consolidation loan approval, this plan will be instituted automatically. Under its terms, you will have to pay off your government debt consolidation loan over the period of 5 to 10 years (depending on the size of the loan). You will have fixed monthly payments. In other words, the value of the payment will remain the same until the loan is fully repaid. While this loan works best when it comes to budget planning, the monthly payments can seem fairly high if you recently finished college and don't have a sound financial footing yet. If that's the case, you may be better off choosing one of the plans listed below.

Graduated Payment Plan

Under this plan, monthly payments start out low, but they increase every two years. The basic assumption is that the payments will increase as you gain more work experience and earn more and more income. It is worth noting that the payments can get quite expensive as you get close to repaying your consolidated loan in full.

Extended Repayment Plan

If your debt is over $30,000, you are eligible for this plan. You will have up to 25 years to repay your debt. You can choose to have either fixed monthly payments or graduated monthly payments. Your monthly payments will be lower, but you'll get higher interest rates than you would with any other plans. As the result, you may wind up paying more in the long run.

Income Contingent Repayment Plan

Under this repayment plan, your monthly payments will be adjusted every year based on your family size, annual adjusted gross income and the total loan amount remaining.  This plan is designed to respond to the changes in your income regardless of how high or low it may get. After 25 years, any remaining balance on the loan will be forgiven, though you may still be required to pay taxes on your remaining debt.