Consolidation loans allow you to consolidate multiple federal student loans into one and select your repayment plan – this may lower monthly payments and interest charges over time.
But consolidation may not always be in the best interests of borrowers; for instance, consolidating commercial FFEL and Perkins loans into Direct Loans won’t qualify them for Joe Biden’s loan forgiveness program.
Table of Contents
1. Lower payments
Student loan consolidation can make your monthly payments more manageable and allow you to focus on paying down other debt, building an emergency fund or saving for important purchases. By consolidating loans, the risk of one being missed and thus damaging your credit is lessened.
If you utilized a cosigner when taking out your original loans, consolidating them may relieve them of responsibility for your debts – something which is especially helpful if considering income-driven repayment plans or student loan forgiveness options.
Student loan consolidation allows you to adjust the repayment term, potentially lowering monthly payments by lengthening its lifespan. Just be mindful of any impact it might have on the total loan balance before proceeding.
As part of your loan consolidation decision, be mindful that it may reset the clock on certain repayment and forgiveness programs. For example, consolidating federal Direct Loans could revoke Public Service loan forgiveness after 120 qualifying payments or Income-Driven Repayment plan (IDR) forgiveness after 20 years; doing so will cancel those benefits and reset your eligibility clock accordingly.
Consolidating federal loans will usually give borrowers greater flexibility with their repayment options, such as selecting a standard 10-year repayment plan instead of an income-driven one.
Consolidation may also give you the best chance at coming out of default. Federal loans in default or rehabilitation may qualify to be consolidated; however, wage garnishment orders or other collection actions cannot.
If your loan servicer continues collecting payments without your request, or collections continue despite that request, other steps need to be taken immediately, such as reaching out and asking them to stop collecting. Deferments and forbearance agreements may help temporarily address this problem while working on solutions such as consolidating loans.
2. Lower interest rates
Consolidating student loans can make managing multiple loan servicers and repayment dates much simpler and reduce monthly payments by creating one larger loan with fixed interest rate payments.
Keep in mind, however, that consolidating loans once is all you can do; any time interest rates decrease after consolidating, any savings will be lost and your new interest rate will be a weighted average of the interest rates on existing federal loans consolidated; also consider that when consolidating you extend repayment by adding years onto original terms.
Considerations should also be given to how consolidation would reset your loan repayment clock; if you are nearing completion of any Public Service Loan Forgiveness programs or similar forgiveness options, consolidation could potentially reset them and potentially compromise any borrower benefits such as rebates or interest-rate discounts from prior loans if consolidated into one new loan.
Finally, it’s important to remember that taking out a Direct Consolidation Loan does not automatically qualify you for income-driven repayment plans or federal loan forgiveness programs like income-driven repayment plans or loan forgiveness plans. FFEL and Perkins loans do not qualify for such programs unless consolidated into a Direct Loan; however, private lenders like LendKey now enable people to consolidate both federal and FFEL loans together without losing eligibility for these programs.
Overall, loan consolidation can provide many borrowers with significant advantages. If you’re struggling to manage multiple payments and repayment dates simultaneously, consolidation could make life simpler and help get you back on track to paying off debt quickly. Just be wary that long-term consolidation costs more by lengthening repayment terms and increasing interest payments – before consolidating student loans take the time to crunch some numbers with our VIN Foundation Student Loan Repayment Simulator before making your decision.
3. Forgiveness options
There are various forgiveness programs to assist with paying off student loans, including Public Service Loan Forgiveness and income-driven repayment (IDR) plans that may reduce payments. Consolidating federal student loans into Direct Consolidation Loans makes qualifying easier.
However, it’s essential to realize that consolidating student loans will change your repayment status significantly. Your grace period will end and repayments must begin two months after consolidation is approved. In addition, benefits associated with certain loan types such as Perkins loans could become ineligible.
Example: If you are in an IDR plan and have made 120 qualifying payments under it, consolidating may cause these to become eligible payments again; since payment counts reset with each Direct Consolidation Loan. Fortunately, your loan servicer may offer to change back your repayment plan to an IDR plan once your loans have been consolidated, so that forgiveness eligible payments continue being made.
If you work for a government or nonprofit employer and hope to receive PSLF, be sure to apply before October 31. The Education Department announced a temporary initiative similar to Limited PSLF Waiver that provides retroactive credit for prior repayment, deferment, and forbearance periods that can be counted toward your 20-25-year loan forgiveness term under an IDR plan.
Notably, if you work for a qualifying employer and are close to meeting the requirements for Public Service Loan Forgiveness (PSLF), consolidating may be wise as PSLF applications take years and consolidating before completing them can jeopardize eligibility. You can use the PSLF Help Tool to evaluate whether your employer qualifies before submitting an application; additionally, this tool shows which payments might be forgiven under standard 10-year repayment plans should IDR plans not be available to you.
4. Consolidation is free
Important details should be considered when consolidating federal loans, including that borrowers can only consolidate them once. Furthermore, those currently in an income-driven repayment plan or working for an eligible employer eligible for PSLF cannot consolidate until leaving those programs. Furthermore, borrowers should keep in mind that switching loan servicers could potentially affect future eligibility for repayment and forgiveness programs.
Though consolidating student loans may pose some drawbacks, consolidation still offers many advantages. One such benefit is streamlining payments into one easy bill; another benefit is longer loan terms which lower monthly payments while freeing up budget space for other expenses; finally consolidation may also help borrowers avoid default by placing their loans into good standing and qualifying them for debt relief options such as deferment or forbearance.
The Department of Education has set forth some stringent requirements in order to consolidate federal loans successfully. A borrower must first have all federal loans either in grace period or active repayment status and made at least three consecutive monthly payments on them before being eligible to use an online application to select which loans to consolidate and how much.
After consolidating, borrowers will receive one Direct Consolidation Loan with terms between 10-30 years based on the total debt outstanding. They then can choose among various repayment plans such as income-driven repayment (IDR), like PAYE and REPAYE; or apply for our standard 10-year repayment plan to work toward loan forgiveness.
Consolidating federal loans can be an excellent way to streamline payment, reduce interest costs, and open up new repayment options for borrowers. Before making any definitive decisions regarding consolidating, however, they should carefully weigh both its advantages and disadvantages.