Government Debt Consolidation Loans

Government debt consolidation loans are not as widely available as some advertisements will have you believe. Most of these loans are for student loans, not for credit card or mortgage debt. However, if consolidating your school debt will help you to pay off your other debt, it may be a good option.

Explore tips on credit card consolidation.

The main form of government sponsored or backed debt consolidation loans are for student loans. Students may be able to consolidate their student loans into one payment. The process does not eliminate debt, but regroups it under one loan rather than multiple loans. The main benefit is having just one loan to pay each month rather than several.

The Federal Family Education Loan is one government loan that allows consolidation. Another option is the Federal Direct Loans program. These loans fall under the Higher Education Act, which allows for loan consolidation of student loans. Those who have student loans or other student related debt from more than one lender may wish to consolidate that debt into one payment. You will need to obtain a new loan from one of these programs to consolidate existing debt.

There are other government loan programs that you may be able to use to consolidate debt. Those who have equity in their home may be able to refinance their home and use the equity to pay down debt. Although this process is not advisable to those who may struggle to make their new mortgage payment, it is an option for some.

• FHA Debt Consolidation Loan: The FHA is a department of the U.S. Department of Housing and Urban Development. It helps those who may not otherwise qualify for a home loan to obtain one. FHA loans offer low qualifications, low interest rates and lower closing costs. You may be able to refinance your existing mortgage and remove the equity from your home to pay off your debt. You can use this method to pay off credit card debt, personal loans or other types of loans.
• VA Debt Consolidation Loan: The VA, or U.S. Department of Veterans Affairs, also offers a similar program to the FHA. This program is only available to those who have served or are serving in the Armed Forces. If your home has equity in it, you may be able to refinance your loan into a VA loan, removing that equity to pay down your debt.

Those planning to use either of the above mentioned government loan programs for debt consolidation should understand the risks involved. Keep in mind that these loans use the equity in your home as collateral to secure the loan.

• If you liquidate equity in your home to pay off credit card debt or other unsecured debt, you are placing your home at risk. Those who default on their home loan, perhaps because the payment is too high, may lose their home to foreclosure.
• Equity loans do not eliminate the debt you owe. They simply wrap the debt into your new home loan.
• Equity loans may cost more in the long term, since some of these loans may stretch out the repayment term for up to 30 years. There are also fees associated with the process, including closing costs.

Those who are confident that they will be able to make their new monthly payment after using one of these government debt consolidation loan options may wish to apply for them. If you do not have equity, you may not qualify for these loan programs. The amount that you qualify for has a basis on your home's appraised value, up to a certain limit. Contact a local or national loan officer to find out if you qualify for these programs.

In addition, check out the Federal Trade Commission's website on debt and debt consolidation loans. This informative website provides information you should read before applying for any loan program to consolidate debt.

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