While the US government does not offer debt consolidation loans directly to consumers, it does back financial institutions that do have debt consolidation loans. If you choose one of these institutions you will enjoy a lower interest rate–due to the fact that the federal government backs the loan.
It is possible to get a grant from the government and use that to pay off your debts. The major difference between a loan and a grant is that you don’t have to repay a grant. However, grants are difficult to obtain and applicants must meet every requirement.
Loans for specific purposes
The government does make available low-interest loans for some specific purposes. For example, it offers Home and Disaster Property Loans, and Rural Housing Loans–as well as other types of single-purpose loans.
Government-backed consolidation loans
The Federal government does have two kinds of debt consolidation loans. They are both loans you would use to consolidate student debt. If you have credit card debt related to your education and student loans from several different sources, you could get a Federal Family Education Loan FFEL). The funds for these loans come from private lenders, such as credit unions and banks, but are supported and subsidized by the US Department of Education. The interest loan for an FFEL loan is a weighted average based on the loans you’re consolidating and then rounded to the closest 1/8 of 1% but cannot be more than 8.25%. As of this writing (May, 2012), the interest rate on an FFEL loan is fixed for the life of the loan.
The second type of government debt consolidation loan is called the Federal Direct Student Loan Program. It is a program that rolls all eligible student loans into a single loan. The benefits of this loan include reduced monthly payments and the fact that you can retain any subsidies you have on subsidized loans.
Other types of debt consolidation loans
If you do not have student loans to consolidate, you might be able to get a debt consolidation loan from your bank or credit union. There are basically two types of debt consolidation loans–secured and unsecured. Secured loans are those that are collateralized, that is you must pledge an asset to secure it. The asset that most people use is their homes. If you are fortunate enough to have equity in a vacation home or if you own a boat or mobile home, you might be able to use it to secure the loan. The downside of a secured loan is that if you fail to make your payments or default on the loan, your lender can seize your asset or force you to sell it in order to pay off the loan.
An unsecured loan
An unsecured loan is one that does not require you to pledge an asset. The most common type of an unsecured loan is a personal loan. The problem is that if you are heavily in debt, you may not be able to get a personal loan or if you do, you may have to pay an outrageously high interest rate. A lender takes a much higher degree of risk with an unsecured loan, as there is nothing that can be seized should you default. If you default on one of these loans the lender can sue you or even garnish your wages.
The biggest drawback
The biggest downside while any debt consolidation loan–whether it’s backed by the US government or not–is that it does nothing to reduce your debt. It simply moves your debt from one lender or set of lenders to another. In other words, if you owe a total of $19,000 in assorted debts and pay them off with a debt consolidation loan, you will still owe the $19,000.