Once financial stress has reached a critical level, many in California will research various debt relief options. For many, debt reorganization through Chapter 13 bankruptcy is the best path out of excessive debt. While this approach gives borrowers the chance to regain control over their finances, it does not offer assistance in reducing student loan debt.
For that, many people turn to debt consolidation. This approach basically involves taking out one large loan to repay several smaller student loans. The end result is one monthly payment, which can simplify bill paying for those who have been paying multiple loans with different due dates and terms. It is possible to find a consolidation loan that has a better interest rate than existing loans, which can reduce the overall cost of student loan debt.
On the other hand, consolidation efforts often extend the length of time required to pay off the debt in full. This can mean a higher cost, even if the new interest rate is lower than the original rates. In addition, the original lenders may offer incentive programs, which would be lost if consolidation occurs.
When considering loan consolidation as part of a debt reorganization plan, it is important to take a long-range view of the matter. By restructuring debt through Chapter 13 bankruptcy, many California consumers will have the ability to focus on paying down their student loan debt, which falls outside of the scope of the bankruptcy process. For others, consolidation is the only way to make student loan debt affordable, even after debt reorganization.
Source: Fox Business, "The Pros & Cons of Consolidating Your Student Loans", AJ Smith, Nov. 17, 2015