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Learning How to Consolidate Student Loans Debt

Most federal student loan holders know that they can consolidate their existing educational loans into one loan by using a federal consolidation program. By calling the Direct Loan Servicing Center, a division of the U.S. Department of Education, one can often have a new consolidation loan in a short period of time at an interest rate that is a weighted average of the interest rates of all the federal student loans currently held by the individual.

But what if the loan holder has additional debt that he/she would like to consolidate into one loan? This new loan would encompass all of the outstanding debt that is currently being held by the individual. There are situations in which this tactic makes sense, and there are other cases in which it would be a waste of time and money.

One reason for debt consolidation is if the borrower cannot afford all of the separate monthly payments. By combining all of the loans into one, the minimum payment due each month is usually substantially reduced, and the loan is spread out over a long period of time. One way to do this is by taking out a personal loan from a bank, but in this case, it is usually best to consolidate all of the other debts into one loan, and combine the student loans into a separate loan so that there are only two loans outstanding. The reason it is not prudent to combine the student loans into one privately funded debt consolidation loan is that there is very little chance that a private loan will be able to beat the low interest rate of an education loan, especially a federal one. In addition, many times the interest paid on federal student loans is tax deductible, so this further lessens the amount of interest that is ultimately paid on the balance. It just doesn't make any sense to give up all of those benefits in favor of reducing the loans down into one. It's better to have two loans in this event.

An exception to this rule is if the consolidation loan is in the form of a home equity loan. Sometimes it is possible to beat the interest rate of a student loan with this type of loan, so if this is the case, then it makes sense to consolidate the student loan debt along with the additional debt into one loan. Since home equity loans are tax deductible as well, the borrower wouldn't be giving up any of the tax benefits, and may actually come out ahead in the long run tax-wise. This is because as a person's income rises, their ability to write off their student loan interest diminishes greatly. Not so with home equity loan interest, as one can keep on writing this amount off no matter how much they make.

Thus, when consolidating debt, sometimes it makes sense to include student loans into the loan along with all of the other forms of debt, and sometimes these loans should be consolidated separately

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