5 Chapter 13 Bankruptcy
Any form of bankruptcy is a last resort, but if you’re barely keeping your head above water and are more concerned with feeding yourself (and possibly a family) than paying back your student loans, consider bankruptcy. Chapter 13 bankruptcy offers consolidation of many types of loans, and if you can prove “undue hardship,” student loans may be included. In many instances, the balance owed will be reduced (some smaller debts may be forgiven altogether), and in most cases the interest rate is lowered, too. Chapter 13 bankruptcy will consolidate all of your debts and help you to regain your financial footing, but keep in mind that it will tarnish your credit record and cause your credit score to tank for a long period, usually at least seven years.
4 Equity Loans
An equity loan—a loan based on the value of a home minus the principal balance owed on it—may be a good solution if you have a property to put up for collateral, and the equity is worth more than your student loans. Home equity loans often offer fixed interest rates and multiple repayment options. Use the equity loan to pay off your student loans in full, and then work to pay back the equity loan.
3 Consolidate Private Loans with a Co-Signer
Much like a co-signer may be required for a mortgage, car loan or personal loan, if your credit is unestablished or poor, the lender may require you to have a co-signer. Don’t let the need for a co-signer stand in the way of applying for a private student loan consolidation: many lenders offer co-signer release options after a certain period.
2 Consolidate Private Student Loans
Private student loans — loans typically issued by banks and other private lenders—are not eligible for the federal loan consolidation program, but don’t cry into your Ramen noodles just yet. There are consolidation programs specifically for private student loans. Essentially, consolidating multiple private student loans means handing them over to another private lender, but one who will give you just one loan with one interest rate. Such lenders will have their own consolidation criteria, including credit requirements.
1 Direct Consolidation Loan
A direct consolidation loan is a multi-loan consolidation option offered directly by the U.S. Department of Education. While it may sound strange to enter into a loan consolidation with essentially the same lender who provided you with the original loans, there are definite advantages—most notably, an interest rate no higher than 8.25 percent. The majority of federal student loans are eligible for direct consolidation with the U.S. Department of Education, as long as you have at least one loan that is in a grace period or is currently being paid on (even if you’re behind, as long as the loan is not in default, you’re in the clear.) Keep in mind that private loans are not eligible for this consolidation option, and if you’ve defaulted on one or more loans, you will need to make special arrangements with the current lender, or choose an income-based repayment plan with the U.S. Department of Education’s Direct Loan Consolidation program.