You’ve just graduated, so you decide to consolidate your federal student loans. You know that it’s easier to manage a couple loans instead of dozens. You also have heard that you can choose the loan servicer of your choice. While you might think you know how to consolidate student loans, it’s easy to make a major mistake thanks to the stupidity of America’s student loan system.
Why do I say this? Financial aid offices are the gatekeepers of student loan debt in America. They give you borrowing options, which often just consist of a form they give you to sign without much discussion.
If you have eligibility for loan forgiveness, taking out an ineligible loan is a costly mistake. Taking out a private loan would be an even bigger disaster. Yet this kind of thing happens all the time.
We’re going to show you how to consolidate federal student loans that your financial aid office never should have given you.
How to consolidate Federal student loans
Going through the process is frighteningly easy. It’s astounding that so many federal student loan consolidation scams charge borrowers over $1,000 without telling them if consolidation is even helpful or not.
Consolidation is not a strategy, it’s a tool in the toolbox that can help with a broader plan. When I say consolidate, know that I mean taking federal loans and turning them into a Direct Consolidation Loan also with the federal government.
You cannot consolidate private student loans into a Direct Consolidation Loan. However, many borrowers as we’ll see later have federal student loans that they mistake for private loans. The consequences can easily be in the tens of thousands if you make a mistake like this.
If you know you need to consolidate, complete the following steps
- You log into studentloans.gov and think you see everything that you owe to the federal government.
- Click on the “consolidate my loans” link, and you’ll see a list of everything you owe. Check all the boxes for the loans you wish to consolidate
- Verify that you don’t have any federal loans at other servicers. Sometimes they don’t show up in the full list.
- Add any loans to the consolidation manually that are eligible but not showing up (such as Perkins or any of the ones below)
- Select your repayment plan, loan servicer (this is the only time you can choose who you want to manage your loans. Unless you’re going for PSLF, we suggest you select Great Lakes), and ask them to process immediately
- Upload all your income info by linking with the IRS
- Agree to all the disclosures, sign, and send it to your spouse to sign if you’re married
- The whole process takes about one to two months. Call the Student Loan Support Center if you have questions at 1-800-557-7394.
Student loan consolidation for Stafford and Grad PLUS Loans
These are the three kinds most often included in a federal student loan consolidation. Keep in mind that Stafford and PLUS loans can either be FFEL (issued before 2010) or Direct (issued mostly after 2010).
The FFEL loans must be consolidated to gain availability for more repayment programs. Direct loans do not need to be consolidated, but there are sometimes benefits to doing so.
The best reasons to consolidate a Stafford or Grad PLUS student loan into a Direct Consolidation loan are:
- Organizing your debt into fewer line items
- Selecting the student loan servicer of your choice
- Reducing the opportunity for mistakes by your loan servicer when you make payments
- If the Stafford or PLUS loans are from before 2010, then you might gain eligibility for new payment plans and Public Service Loan Forgiveness (PSLF) if the loans are FFEL and not Direct
You shouldn’t consolidate Stafford and Grad PLUS loans if you
- Already have made income driven payments on your loans
- You need extra forbearance options (you get up to three years before consolidating and up to three years after for Direct loans)
- Plan to refinance your loans within six months
How your financial aid office can hurt you badly from incompetence
I had a case recently where a dentist had around $60,000 of health professions loans through one of the random student loan servicers. The loans did not show up on her list of debt under the NSLDS summary.
She got a 5% interest rate, and she assumed that she needed to pay this debt off. She thought it was basically a private loan.
Here’s where the traditional mindset around debt can really screw you. Financial aid officers think, “hey we can max out this person’s Stafford loans, but instead of giving them 7.6% Grad PLUS with a hefty origination fee, let’s give her some alternative federal debt at a lower interest rate!”
It’s even worse when they have this same mindset but give the student private loans instead. I had a physical therapist recently who had six figures of private loans from a big bank that would’ve been eligible for forgiveness. Her financial aid office convinced her that the lower interest rate would help her. Now she’s stuck paying on six figures of debt that could’ve been forgiven. Talk about bad advice.
Case study with Health Professions Student Loans (HPSL) and Loans for Disadvantaged Students (LDS)
In the case above where the school suggests an alternative federal loan, here’s how this works.
Certain professions can qualify for bizarre types of federal loans, like Health Professions Student Loans (HPSL) and Loans for Disadvantaged Students (LDS).
You might get these kinds of loans in medical school for example.
Certainly, if you pursue a private practice and come out with a modest amount of debt overall, these kinds of student loans rock. No interest accrues until after the grace period, and the origination fees are much lower.
Here’s the catch though: HPSL and LDS loans do not qualify for PAYE, REPAYE, or PSLF unless they’re consolidated. If you fail to consolidate them, they function like private loans.
Congress created these programs with legislation like the Health Professions Education Assistance Act of 1963 and the Disadvantaged Minority Health Improvement Act of 1990.
When they passed major student loan reform that created all the current forgiveness programs in 2007, they didn’t think to address this older legislation.
Hence, an underrepresented student from a low-income background might get loaded up with a bunch of Stafford, HPSL, or LDS loans in med school.
She graduates and works in a 501c3 hospital. Her Stafford loans qualify for PSLF after 10 years. Her HPSL or LDS loans would not.
In contrast, her peer from a non-disadvantaged background gets steered into Direct Grad PLUS loans. These happen to be PSLF eligible.
If she had never talked with a student loan consultant like us but had taken out Grad PLUS loans instead, she would not have had to pay the full amount of the debt back to the government. Basically, not consolidating one of these ineligible loan types for PSLF could save you a couple thousand in interest but cost you $100,000 or more in forgiven principal.
Still think our student loan system isn’t broken?
The only way a borrower could get loan forgiveness on these special HPSL and LDS federal loans is to include them in a consolidation. Even then, that borrower would have to know how to specifically request it.
Isn’t it ironic and sad that a loan type that Congress invented to encourage low income and underrepresented persons to go into medical careers can wreck their finances?
Other student loans that you didn’t know could be consolidated
Hopefully, you’ve sensed my outrage. I think it’s terrible that if that client hadn’t consulted with us, she never would have known that her Health Professions loan could be consolidated and made eligible for loan forgiveness.
Obviously, if you can get forgiveness and pay less than you owe, the interest rate doesn’t really matter that much. This traditionalist mindset to debt repayment is one of the most common sources of major student loan mistakes that we see.
Besides the loans that we’ve already mentioned, here are the remaining kinds of student loans that can be consolidated into a Direct Consolidation loan. I’ve added some acronyms so you could ask your loan servicer if you have any.
- Supplemental Loans for Students
- Federal Perkins Loans (usually better to consolidate than utilize Perkins cancellation)
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans (HEAL)
- Health Professions Student Loans (HPSL)
- Loans for Disadvantaged Students (LDS)
- FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
- Federal Insured Student Loans
- Guaranteed Student Loans (issued before 1992)
- National Direct Student Loans
- National Defense Student Loans
- Parent Loans for Undergraduate Students (Parent PLUS)
- Auxiliary Loans to Assist Students
Note that Parent PLUS cannot be consolidated into the child’s name. You have to consolidate them into your name use ICR to receive loan forgiveness. You also do not want to consolidate Parent PLUS loans with any other loan type.
The other three loan types that can be consolidated were the Stafford Subsidized, Unsubsidized, and Grad PLUS loans. That makes up the 17 types that can be consolidated.
When you pay back your loans, see if Federal Student Loan Consolidation can help
More likely than not, if you took out loans for the first time after 2010, you probably started out with the regular Direct Stafford and Direct Grad PLUS loans.
If you did consolidate, then you have Direct Consolidation loans. That’s not really that life-changing to go from Direct to Direct, but it can be helpful since you’ll get less paperwork.
However, if you have any other loan type that’s not direct, you could really mess up big time. While you could certainly read all the material on this site for free, I’d suggest reaching out to an expert like us to get a custom plan if you have a five-figure amount of these “alternative” loan types.
In general, you either want your loans to all have federal direct consolidation loan status and be on track for loan forgiveness, or you want to refinance them and get cash back bonuses.
Either way, Congress did not do student loan borrowers any favors by creating 17 different types of student loans. Student loan consolidation can sometimes be a good way to fight back.
Have questions about student loan consolidation? Did you take out any of the types of loans above? Reach out below in the comments!