Borrowers with multiple federal student loans may find it difficult to keep track of making several payments a month.
To streamline the process, borrowers have the option to consolidate some or all of their federal student loans into one. Rather than multiple loans with differing interest rates, borrowers who consolidate all of their student loans would have one monthly payment at a fixed interest rate.
Consolidation is not for every borrower, however, so here are some factors to consider before applying for a federal direct consolidation loan.
Qualifying Types of Federal Student Loans
Borrowers must have the right type of student loans to qualify for consolidation. Most federal student loans qualify, including:
— Subsidized, unsubsidized and nonsubsidized federal Stafford loans
— Direct PLUS loans
— Supplemental loans for students
— Federal Perkins loans
— Nursing student loans
— Nurse faculty loans
— Health education assistance loans
— Health professions student loans
— Loans for disadvantaged students
— Direct subsidized and unsubsidized loans
— PLUS loans from the Federal Family Education Loan program
— Some FFEL consolidation loans and direct consolidation loans
— Federal insured student loans
— Guaranteed student loans
— National direct student loans
— National defense student loans
— Parent loans for undergraduate students
— Auxiliary loans to assist students
[Read: What You Need to Know About College Tuition Costs.]
“There’s still an option of possibly refinancing student loans with a private lender,” says Jeff Arevalo, financial wellness expert at GreenPath Financial Wellness. “But the thing to keep in mind is that the borrower’s credit and debt-to-income ratios are going to come into play for that. And if you do refinance into some type of private loan product, then you may lose some of those protections and flexibility that you have when they are still under the federal umbrella.”
Borrowers who can consolidate may also lose certain benefits, like principal rebates, loan cancellation or interest rate discounts, according to the U.S. Department of Education.
Should I Consolidate My Federal Student Loans?
Consolidation provides borrowers a chance to change their student loan servicer, experts say. It can also lower monthly payments by giving borrowers up to 30 years to repay their loans.
Although borrowers can increase the length of repayment, their interest rates could be higher. Taking longer to pay back the loan typically means more money paid in interest over time.
[Read: What Expenses You Should Cover With Student Loans.]
As part of the federal student loan payment pause that began in March 2020 with enactment of the federal CARES Act, the interest rate for direct consolidation loans was 0%. But with repayment set to restart in October 2023, the fixed interest rate for all direct consolidation loans has resumed. This rate is determined by the weighted average of the statutory interest rates on the loans being consolidated rounded up to the nearest one-eighth of 1%. There is no cap on the consolidation loan’s interest rate.
When deciding whether to apply for a consolidation loan, consider the interest you will pay “versus what you were paying,” says Dan Claffey, director of EdMD, a college admissions and financial aid consulting firm.
“That can be hard for people to figure out when you have eight different loans at eight different interest rates with eight different balances,” Claffey says. “Borrowers should make sure that they compare those numbers themselves before they just jump in and assume that they are going to save money because they are looking at the payment.”
Another important consideration is that if you do the loan consolidation, any interest owed on loans to be consolidated will be added to the principal of your consolidation loan. This is called capitalization and means that interest will have to be paid on a higher principal balance than may have been the case had you not consolidated.
Additionally, federal student loans in default can be consolidated and, in some cases, reconsolidated. To do so, borrowers must either make three consecutive monthly payments on the loan before consolidation or agree to pay the new direct consolidation loan under an income-driven repayment plan.
“For many students, consolidation is a good thing. It’s just an easy way to keep track of what they’re obligated to pay,” says Ronald Ramsdell, founder of College Aid Consulting Services. “Students and the parents need to do their homework and just determine, via the pros and cons, what’s best for them.”
For instance, “if you have already have direct loans and you finished school during the pandemic and you entered a repayment for the first time and you don’t have any gaps between undergrad and grad, then there’s really no need to consolidate,” says Jan Miller, president of Miller Student Loan Consulting, LLC.
How Does Consolidation Effect PSLF?
Consolidation isn’t typically advantageous for borrowers in the federal Public Service Loan Forgiveness program. Under ordinary circumstances, consolidating federal student loans erases any progress a borrower has made toward PSLF by restarting the clock. Essentially, previous qualifying payments made toward student loan forgiveness no longer count.
But due to the establishment of the limited PSLF waiver on Oct. 6, 2021, any prior period of repayment temporarily qualified for PSLF, regardless of the loan program. Borrowers had to consolidate all nondirect federal student loans, such as FFEL program loans or Perkins loans, into the direct loan program before the limited waiver expired on Oct. 31, 2022.
Although the limited waiver has now ended, borrowers who work in public service and missed the deadline have another chance to increase their PSLF payment count. As part of a one-time account adjustment, borrowers who do not have direct loans have until the end of 2023 to submit a consolidation application, in which case they will receive PSLF credit for prior payments.
To be eligible for the PSLF program previously, borrowers needed to be employed full-time by a U.S. federal, state, local or tribal government or nonprofit organization in a qualifying job; have direct loans; be on an income-driven repayment plan and make 120 qualifying payments.
How to Apply for Federal Student Loan Consolidation
There’s no credit check to qualify for consolidation, and there’s no application fee.
Borrowers can apply directly through the Federal Student Aid website or download and print a paper application to submit via mail to the chosen consolidation servicer. Those servicer options are Aidvantage, EdFinancial, ECSI, MOHELA, Nelnet, OSLA Servicing and Default Resolution Group.
Be prepared to enter personal information, including a phone number, home address and email, as well as financial information such as account statements, bills and education loan records. You must have a verified FSA ID.
[Read: See How Average Student Loan Debt Has Changed in 10 Years.]
You will also be asked to indicate which loans you want to consolidate and select a repayment plan. Processing of your application can be delayed if any of the loans chosen for consolidation are in a grace period.
The form, which is free to complete, takes an average of 30 minutes or less, according to the Department of Education. After consolidation, borrowers will have a single monthly payment.
In June, President Joe Biden’s federal student loan forgiveness plan — which would have provided up to $20,000 in debt relief to eligible borrowers — was struck down by the U.S. Supreme Court. However, the administration has since announced several new initiatives to support student loan borrowers, including introducing a new repayment plan known as Saving on a Valuable Education, or SAVE.
“With possible changes coming up in the student loans department, it may be beneficial if (borrowers) are considering consolidation to do it now,” Ramsdell says. “But the new changes, they’re not etched in stone yet.”
Who Do I Contact if I Need Help?
Borrowers with questions about federal student loan consolidation can contact the Federal Student Aid Information Center, known as the FSAIC, which provides support on behalf of the Department of Education. The FSAIC’s help number is 800-433-3243.
But the best points of contact, experts say, are your student loan servicers.
“They are the ones that handle the consolidations and that’s who borrowers should be talking to,” Claffey says. “Not a third party that sends them something in the mail or sends them a soliciting email.”
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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A Guide to Federal Student Direct Loan Consolidation originally appeared on usnews.com
Update 09/11/23: This story was previously published at an earlier date and has been updated with new information.
