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Debt consolidation is often advisable in theory when someone is paying credit card debt.^[2] Credit cardscan carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral.^[2]Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest....

[edit]In the United States, federal student loans are consolidated somewhat differently than in the UK, as federal student loans are guaranteed by the U.S. government.Student loan consolidation

[edit]United States

In a federal student loan consolidation, existing loans are purchased by the Department of Education. Upon consolidation, a fixed interest rate is set based on the then-current interest rate. Reconsolidating does not change that rate. If the student combines loans of different types and rates into one new consolidation loan, a weighted average calculation will establish the appropriate rate based on the then-current interest rates of the different loans being consolidated together.^[3]

Federal student loan consolidation is often referred to as refinancing, which is incorrect because the loan rates are not changed, merely locked in. Unlike private sector debt consolidation, student loan consolidation does not incur any fees for the borrower; private companies make money on student loan consolidation by reaping subsidies from the federal government.^{[citation needed]}

[edit]United Kingdom

In the UK Student Loan entitlements are guaranteed, and are recovered using a means-tested system from the students future income. Student Loans in the UK can not be included in Bankruptcy, but do not affect a persons credit rating because the repayments are recovered from the students future salary at source by the employer before any income is paid, similar to Income Tax and National Insurance contributions. Many students however, are struggling with debt well after their courses have finished

As of June 2011, total personal debt in the UK stood at £1,451bn. The annual growth rate remained at 0.8%.^[4]

[edit]Concerns

In recent years, reports in the media have raised concerns about the use of consolidation loans.^[5] The worry is that many people are tempted to consolidate unsecured debt into secured debt, usually secured against their home. Although the monthly payments can often be lower, the total amount repaid is often significantly higher due to the long period of the loan. Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem. In some circumstances, snowballing debt may be a better solution.

[edit]Alternatives

Other options available to overburdened debtors include credit counseling, debt settlement and personal bankruptcy. Some consolidation lenders will renegotiate with the creditors on the debtor's behalf, as a credit counselor does.

[edit]See also

List of finance topics

[edit]References

^ Joan Ryan (14 January 2011). Personal Financial Literacy. Cengage Learning. pp. 292–. ISBN 978-0-8400-5829-4. Retrieved 13 December 2011.
^ ^a ^b Lois A. Vitt; E. Craig MacBean; Jürg K. Siegenthaler; Institute for Socio-Financial Studies (30 November 2003). Encyclopedia of Retirement and Finance. Greenwood Publishing Group. pp. 37–. ISBN 978-0-313-32834-3. Retrieved 13 December 2011.
^ Deborah Lucas (August 2010). Costs and Policy Options for Federal Student Loan Programs. DIANE Publishing. pp. 1–. ISBN 978-1-4379-3158-7. Retrieved 13 December 2011.
^ "Debt Facts and Figures - Compiled August 2011". creditaction.org.uk. August 2011. Retrieved 10 May 2012.
^ "Home or a Loan?", BBC News, May 5, 2006

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