Types

• There are relatively few forms of federal consolidation loans. The government extends loan guarantees, a form of loan insurance, on several types of loans, including mortgages. However, the government does not issue actual loan funds in many areas. Exceptions include federal student loans, USDA loans and emergency loans. If you have existing federal loans in these areas, you may be eligible for consolidation. If you have private loans in these areas, you will not likely qualify.
  
  

Example

• A student must take a separate Stafford loan, a form of education funding, for each term he or she attends school. Since the Stafford loan program is provided through the U.S. Department of Education, the student will be eligible for federal student loan consolidation. If the student took the loans through a private lender, he or she will not be eligible. The interest rates and terms of the two loan types, private and federal, are not generally compatible.
  
  

Options

• If you have loans you would like to consolidate but are not eligible for federal consolidation programs, you will have to seek private consolidation or refinancing. In many cases, private consolidation can be extremely beneficial, reducing your monthly payments and allowing you to pay off your debts in a manageable schedule. However, you will not likely achieve the same low interest rates on a privately consolidated loan as you would on a federally consolidated loan.
  
  

Prevention/Solution

• In order to prevent a scenario where you are excluded from a federal consolidation loan, consider taking federal loans from the beginning. This process, though it requires additional forms in most cases, may actually benefit you in the long run. Federal loans are available to all credit worthy borrowers, and most do not have need or income requirements. If you do have a strong need, such as a low income federal student loan, the benefits may be even greater.
  
  

Warning

• If you take a federal loan or use federal loan consolidation, you will face unique restrictions on your loan. For example, you may be prevented from taking new federal loans until the debt has been paid off. In the case of a federally backed business loan or home loan, you may be restricted from using any equity in your property to take on more debt. These restrictions are one of the main reasons some individuals choose to work in the private sector rather than electing government loans.