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 complexity 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. And taking out loans with private companies would be an even bigger disaster. Yet this kind of thing happens all the time.
Also note that the Biden administration issued an executive action on October 6, 2021 whereby any borrower with FFEL student loans who has worked in the public sector would need to consolidate to benefit from Public Service Loan Forgiveness. Clearly student loan consolidation is an important tool, but it’s not the right action for everyone.
In this guide to federal student loan consolidation, we’re going to show you how to consolidate federal education loans, some of which your financial aid office never should have given you.
Pros and cons of federal student loan consolidation
Before we get into how to consolidate federal student loans, it’s important to understand what you stand to gain or lose by doing so. Here a few of the biggest benefits and drawbacks of federal student loan consolidation.
Pros of federal student loan consolidation
One of the biggest benefits of taking out a Direct Consolidation Loan is that it could make you eligible for more income-driven repayment (IDR) plans or forgiveness programs. Several types of federally-backed loans don’t qualify for IDR plans or Public Service Loan Forgiveness (PSLF) but can become eligible after being consolidated. We’ll discuss this in more detail later.
You might also find that you have lower monthly payments after consolidating. Depending on your student balance, the maximum repayment term for a Direct Consolidation Loan can stretch out as long as 30 years.
If you currently have variable rate federal loans, taking out a federal consolidation loan allows you to lock in a fixed rate loan at today’s near-all-time lows. And, finally, you’ll have the opportunity to switch to the federal loan servicer of your choosing (we recommend Great Lakes).
Cons of federal student loan consolidation
Many borrowers are disappointed to learn that the Department of Education doesn’t offer the same rate for Direct Consolidation Loans that it gives to new student borrowers. Instead, your interest rate will be determined by taking the weighted average of all the loans that are being consolidated and rounding up to the nearest one-eighth of one percent.
If you’d like to reduce your interest rate, your only option is to apply for student loan refinancing with a private lender. Of course, you’ll typically need at least a good credit score to refinance your loans and an excellent score to qualify for the best rates. Plus, you’ll no longer qualify for federal student loan benefits (like IDR plans or PSLF) after refinancing.
Because you’re taking out a brand new loan when you consolidate, your repayment clock resets. That means you’ll lose credit for any qualifying payments you may have already in an IDR plan or towards PSLF forgiveness.
Finally, it’s important to understand that your overall cost of repayment is likely to be higher after consolidating. The first reason is that you’ll be paying your loan back over a longer period of time. And, second, if unpaid interest has accumulated on any of your loans, that interest will capitalize when they’re consolidated.
How to consolidate federal student loans
It’s important to point out there are many companies that will charge you a fee to assist with consolidating your loans. These companies have no affiliation with the Education Department. It’s astounding that so many federal student loan consolidation scams charge borrowers over $1,000 when the process is so easy to do on your own.
If you know you need to consolidate, complete the following steps to do so electronically (or you can download the paper application here):
- You log into studentloans.gov and think you see everything that you owe to the federal government.
- Click on the “consolidate my loans” link to start the Federal Direct Consolidation Loan application. 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 your promissory note, and send it to your spouse to sign if you’re married.
Federal student loans shouldn’t cost you anything as there is no application fee. The whole process usually takes about one to two months. Call the Student Loan Support Center if you have questions at 1-800-557-7394.
Federal 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 from the FFEL program (issued before 2010) or Direct Loan program (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 federal student loan debt into fewer line items
- Selecting the student loan servicer of your choice
- Reducing the opportunity for servicer mistakes when you make federal student loan 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 from the FFEL program 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 6.28% 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. If she would taken out federal student loans, they would’ve been eligible for cancellation benefits.
But 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. Two common examples are 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.
They passed the major student loan reform that created all the current forgiveness programs in 2007. And 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 HPSL or LDS loans in med school.
So let’s say my dentistry student client 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. So not consolidating one of these ineligible loan types for PSLF could save her a couple thousand in interest but cost her $100,000 or more in forgiven principal.
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)
- Plus Loans from the Federal Family Education Loan Program (FFEL)
- 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 repay 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!