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Chapter 3: Consolidation & cancelation/forgiveness

Consolidation is the combining of existing loans into one new loan. You can consolidate all, some, or just one of your student loans. (However, in general, you cannot consolidate a consolidation loan by itself.) For borrowers with student loans spread among multiple lenders, being able to make just one payment to a single lender can be a huge relief. You may also be able to get a lower payment by consolidating your loans. You do not have to be current with payments to consolidate – in fact, many delinquent borrowers use consolidation to get back on track. If you have federal and private loans, you cannot combine your private loans with your federal loans into a federal consolidation loan. You can consolidate your federal loans and private loans with a private consolidation loan, but this is not recommended, as you lose the rights granted to federal loans, such as deferment and alternative repayment plans.

The circumstances in which a federal student loan may be canceled in full include the death or permanent disability of the borrower or attendance at a school where you were either falsely certified or the school closed before you could complete the program (and you don’t complete a comparable program at another school). Some federal loans are eligible for full or partial forgiveness if you are a member in a uniformed service, teach or provide services to needy populations, work in a health care profession or law enforcement, or participate in a government volunteer program (such as the Peace Corps or VISTA). Check with your school, lender, or employer for details about cancelation.

What about bankruptcy? Can you discharge your student loans like you can other debt? Generally, no. Student loans are extremely difficult to discharge in a Chapter 7 bankruptcy. You must prove that repayment would cause you undue hardship. You may include student loans in a Chapter 13 repayment plan. They must be repaid in full, but collections actions, such as wage garnishment, cease the moment you file.

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