Fact Checked

What is a Government Debt Consolidation Loan?

Melissa McKean
Melissa McKean

A government debt consolidation loan is a loan given by a government program or agency in order to help a person pay off debts he or she owes to multiple institutions simultaneously. The debtor basically surrenders all outstanding balances to the government entity, which will pay them and issue a new loan representing the balance owed, plus some degree of interest in most cases. People often like this sort of structure because of its convenience. They can make just one payment instead of many, and they don’t have to keep track of multiple due dates. Depending on the type of loan the interest rate might also be less.

These sorts of loans aren’t available in all places or even for all debt. The United States typically offers the most robust debt consolidation services, and most programs there are designed for student loans, which is to say loans incurred for university education. Sometimes debt associated with home mortgages, car payments, and even credit card bills can be consolidated, but not always. A lot depends on jurisdiction and local laws.

How It Works

College students often get debt consolidation loans to pay off education expense.
College students often get debt consolidation loans to pay off education expense.

When a person signs up for this type of loan, a government agency or consolidation company pays off the debt in full to all of the collectors. The consolidator then issues a new loan for the same amount with a secure interest rate, which basically means that the rate isn’t going to change unless the borrower fails to make payments or otherwise defaults. In most cases these sorts of terms and conditions are agreed to by both parties at the outset.

A debt consolidation loan can help someone with many debts.
A debt consolidation loan can help someone with many debts.

There are a couple of different reasons why government entities extend loans to citizens, but in most cases it’s in order to facilitate financial transparency and, ideally, to create more fluidity in the marketplace. People who have their debts under control are less likely to go bankrupt or become dependent on government aid, and in many cases will actually be able to spend more as a result of their reduced debt load. Over time this can improve the economic conditions of entire regions and localities. Governments also usually have an interest in helping citizens do things like get an education or purchase a home without incurring crippling debt.


Consolidation loans typically come in four broad types, known as “programs.” The standard payback plan sets a general monthly payment amount that is consistent over the time of the loan. An extended payment plan, by contrast, increases the time of the loan by decreasing the monthly payment, but typically carries a higher interest rate for this privilege. The graduated payment plan is something of a combination of both; it starts out with a lower monthly payment amount but increases after a specified time period. This sort of scheme is particularly attractive to people who aren’t making a lot of money in the present, but intend to make more as time goes by. Students are a common example.

The fourth option is an income contingent plan that takes the borrower’s salary and earning potential into account when setting the monthly payment. Not everyone can qualify for this plan, and it’s usually designated for people who don’t make much to begin with. It’s also important to note that not all debts are eligible for all four programs, and neither are all borrowers. A lot depends on the specifics of the consolidation and the policies and rules of the consolidating agency.

Common Examples

At least in the United States, this sort of loan is most common in the higher education sector. The majority of American college and university students borrow money, often from various lenders, in order to pay their tuition; consolidation in these settings can help students secure competitive interest rates and simplify their monthly payments. Consolidation is also possible for various other sorts of debt, though a lot depends on jurisdiction, agency availability, and local laws. People can often consolidate home loans and mortgages, for instance. Some lenders will roll car loans or other personal property liens into this, in or might offer to consolidate these independently. In certain instances government agencies will also assume credit card debt, though this is less common.

Primary Benefits

One of the biggest benefits of government debt consolidation loans is their convenience. Instead of making loan payments to various vendors, the borrower is able to make one payment to one institution. The loan can always be paid on the same date, and the borrower does not have to worry about different arrangements and rules. Without the confusion of multiple payments, people often have a better chance of getting out of debt in a shorter period of time.

In many cases monthly payments are lower, too, which can make repayment easier — and can free up money for saving or spending. It’s often true that the length of the loan can be increased in order to decrease monthly payments and make repayment more feasible. There are usually a variety of payment plan options depending on the consolidation agency, and interest rates also tend to be very competitive, too, particularly for people without good credit scores.

Risks and Warnings

While consolidating is often a really good idea, it is not without its risks. Once the government owns a person’s debts, there isn’t usually any more room to maneuver. Sometimes the owning agency will be flexible with terms and conditions down the line, but not always. These sorts of loans are generally designed to be favorable to debtors, but they usually only work when payments are made promptly and on time. The penalties for default vary from institution to institution, but can in some cases be harsher with governmental bodies than they would have been in the private sector.

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Discussion Comments


How can I find out more about government consolidation loans? Where do I go to start it in Sacramento, Calif.


@ GenevaMech- You should be able to get the debt consolidation loan application from your financial aid office at your school. If you cannot get the application from your school, you can apply on the federal government's student aid website ( I hope this helps.


@ FrameMaker- Where can I find the government’s student debt consolidation loan application? I would like to take advantage of the benefits offered by the new student loan program.


The new changes to the student lending process have created another reason for student loan debt consolidation. All Stafford, Perkins, and Plus loans are now serviced through the federal government, cutting out the banks. The repayment terms of these new loans are now different, becoming more favorable for the student.

Rather than place a time limit on when the student must repay the loan, the government has set a cap on payments. Payments are set at 10% of a student's monthly income, although the government does not penalize early payment. These new repayment terms can stretch the repayment period beyond the previous eight year limit set by the banks.

For students entering a tough job market, this can be the difference between education creating opportunity and education leading to bankruptcy.

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    • College students often get debt consolidation loans to pay off education expense.
      By: zimmytws
      College students often get debt consolidation loans to pay off education expense.
    • A debt consolidation loan can help someone with many debts.
      By: forestpath
      A debt consolidation loan can help someone with many debts.