Ask The Money Coach

By Lynnette Khalfani-Cox, The Money Coach

You can consolidate some of your student loans into one payment in an effort to reduce your monthly payments.

Before you can consolidate, you have to bring your loan(s) out of default status, if any are in default. You do this by making just three monthly payments — on time, and in any amount that you and your lender agree upon.

Do You Qualify?
To find out if you qualify for loan consolidation, contact the Federal Direct Consolidation Loan Info Center at 800-557-7392 or go online to http://loanconsolidation.ed.gov.

If you call, the staff there should be able to tell you what your monthly payment will need to be for those three months while your loan is in repayment.

Impact on Your Credit
The one drawback to consolidation is that your credit remains tarnished if your loans previously were in default. Even though your loan will be paid off and listed as “paid in full” on your credit report, you’ll get a new loan through consolidation and that previous default still shows on your credit report for seven years.

An alternative, to fix your credit, and have all past negative information about your student loans completely deleted from your credit file is to go through loan rehabilitation:

In a nutshell with rehabilitation you make 9 or 12 on-time payments on your student loans in an amount you can afford. You make nine monthly payments on Direct Loans and Federal Family Education Loans, or 12 monthly payments on Perkins Loans. This, in my opinion, is the preferred route as it will help you restore your credit in a big way, so your past default won’t haunt you for years to come.

Further Reading
For more details about various alternatives to cure your student loan delinquency, check out the Department of Education’s guidebook called “Options for Financially-Challenged Borrowers in Default.” Here is a link to the guide online: http://www.ed.gov/offices/OSFAP/DCS/forms/2004.Borrower.Options.pdf

For more information on paying off your student loans, check out my book, Zero Debt for College Grads: From Student Loans to Financial Freedom. Get the book now at Amazon.com.

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