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How to Consolidate Debt

Learn how to consolidate credit card debt, student loans and tax debt – each in a simplified debt repayment plan.

cartoon of man looking into telescope in search of debt free land

Debt consolidation is a debt solution that allows you to combine multiple debts of a similar type into one monthly payment. This simplifies debt repayment so you only need to worry about one bill. It can also provide other benefits, such as lower interest charges and monthly payments. But how does it work?

How to consolidate debt, in general

  1. You use debt consolidation when you have multiple debts of a similar type to repay.
  2. Then you find a solution that combines them into one repayment plan.
  3. At the same time, you may reduce or eliminate interest charges applied to the debt, although this doesn’t occur in all cases.
  4. Consolidation can also stop future penalties, if you’ve fallen behind on any debt payments.
  5. This allows you to get out of debt faster, with less hassle.

Does consolidation work for any type of debt?

For the most part, you can only consolidate debt unsecured debts of a similar type. Secured debt refers to any loan that has collateral. So, you typically don’t consolidate mortgages or auto loans.

You can consolidate the following:

  1. Credit cards
  2. Student loans
  3. Tax debt

Each type of debt must generally be consolidated separately. So, for instance, you usually can’t combine student loans and credit cards together. There are different ways to consolidate each type of debt:

Type of DebtOptions for Consolidation
Credit card debt1.      Balance transfer2.      Consolidation loan

3.      Assisted consolidation program

Student loan debt1.      Federal Direct Consolidation Loan + federal repayment plan2.      Private consolidation loan
Tax debt1.      Installment agreement

How to consolidate credit card debt

With credit card debt, the goal of consolidation is always to reduce or eliminate interest charges applied to the debt. Credit cards have relatively high interest rates, which makes it difficult to pay off balances quickly. Consolidations rolls all those balances into one repayment plan at the lowest interest rate possible.

There are three ways to consolidate credit card debt:

  1. Credit card balance transfer
  2. Personal debt consolidation loan
  3. Debt consolidation program

How to consolidate debt with a balance transfer

This option only works if you have a limited about of debt and a good credit score.

  1. You apply for a balance transfer credit card that offers a 0% APR promotion.
  2. You get approved based on your credit; a higher score means a longer 0% APR promo period.
  3. Once you open the account, you transfer your existing balances for a fee; this generally ranges from $3 per transfer to 3% of each balance transferred.
  4. This pays off your existing credit card balances.
  5. At 0% APR, you can pay off the consolidated debt interest-free
  6. The goal is to pay off the full balance before the 0% APR promotion period ends.

Learn more about balance transfers »

How to consolidate credit card debt with a personal loan

This is another form of do-it-yourself debt consolidation. It generally only works if you have a good credit score.

  1. You apply for a personal loan for an amount high enough to pay off all your credit card balances.
  2. Loan approval and the interest rate you secure depend on your credit score.
  3. Once approved, the funds are disbursed to pay off your credit card balances.
  4. This leaves only the low-interest loan to repay.
  5. The monthly payments are generally lower once you consolidate your debt.

Learn more about consolidation loans »

How to consolidate credit card debt if you have bad credit

This option is the only solution you can use to consolidate debt if you have a bad credit score. It’s also referred to as a debt management plan or debt management program.

  1. You apply for the program through a consumer credit counseling agency.
  2. They review your debts, credit and budget to see if a debt management plan is the right choice for consolidation in your situation.
  3. They work with you to find a monthly payment you can afford.
  4. Then, they negotiate with your creditors to:
    1. Get them to accept the adjusted payment schedule
    2. Negotiate to reduce or eliminate interest charges
  5. Once your creditors agree, your plan starts. You pay the agency one payment each month; they distribute the funds amongst your creditor as agreed.

It’s important to note that this solution doesn’t transfer your debt to the credit counseling agency. You still owe your original creditors. This is basically a professionally assisted repayment plan that makes it faster and easier to get out of debt.

Learn more about debt management plans »

How to consolidate student loan debt

Student debt is a little unique when it comes to consolidation. Interest rate reduction is not always the primary goal. That’s because federal student loan interest rates work differently than rates on other types of debt. As a result, you can’t always consolidate to cut interest rates.

Instead, you generally consolidate student loans to achieve one of two things:

  1. Faster loan repayment
  2. Lower monthly payments

That being said, there is a way to lower APR on student loans. However, it often involves converting federal student loan debt to private.

How to consolidate with a Federal Direct consolidation loan

You can only use this solution to consolidate federal student loans; this does not include PLUS loans to parents or private student loan debt.

  1. First, you apply for a Federal Direct consolidation loans.
  2. To be eligible, you must have at least one Federal Direct loan.
  3. If so, you can consolidate most types of federal student loans with it, minus PLUS loans to parents.
  4. The rate on the new loan is a weighted average of the rates on your existing loans.
  5. The term is always set to 10 years, so your payments depend on how much you owe.
  6. If the payment is too high, then you can move the consolidated debt into a hardship-based federal repayment plan.
  7. This extends the term of the loan to 20-30 years, which lowers your monthly payment.
  8. The monthly payment amount is based on your Adjusted Gross Income (AGI) and family size.
  9. You must recertify your income and family size each year to maintain enrollment.

Start by exploring Federal Direct Loans »

How to consolidate student loan debt with a private consolidation loan

This option is what you use if you want to lower the interest rates applied to your student debt. It can work for both federal and private student loans. However, it converts any federal student loan debt to private, which makes you ineligible for programs, like student loan forgiveness.

  1. You apply for a student debt consolidation loan through a private lender.
  2. The rate will be at least partially based on your credit score (rates on student loans tend to be lower than for other types of debt).
  3. Once approved, you use the funds you receive to pay off your other loans.
  4. This leaves only the lower-interest consolidation loan to repay.

Learn more about private consolidation »

How to consolidate IRS tax debt

This final type of debt consolidation applies only to IRS tax debt. If you owe back taxes to the IRS, you can consolidate the debt from multiple filing years into a single repayment plan.

  1. You apply for an Installment Agreement (IA) through the IRS.
  2. The IRS works with you to set up a repayment plan that works for your budget.
  3. The more you owe, the close the IRS will scrutinize your income and expenses to see what you can really afford.
  4. At the same time, you may also use penalty abatement to reduce penalties and interest charges applied to your debt.
  5. Once approved, you make one monthly payment until your debt is paid off.

Learn more about Installment Agreements »


Article last modified on February 12, 2018. Published by, LLC . Mobile users may also access the AMP Version: How to Consolidate Debt - AMP.