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Consolidating your federal student loans could simplify your repayment plan and give you access to new benefits. Certain borrowers interested in the Public Service Loan Forgiveness program may even be required to consolidate.
But unless it’s required to qualify, consolidating your loans could hurt your progress toward forgiveness instead of helping it. Here’s what you need to know before you make a decision.
In this guide:
- What is Public Service Loan Forgiveness?
- What does consolidation mean for my loans?
- How does consolidation affect my ability to qualify for PSLF?
- Should I consolidate if it means I have to wait longer for PSLF?
- Are there alternatives to consolidation that enable me to qualify for PSLF?
What is Public Service Loan Forgiveness?
Public Service Loan Forgiveness (PSLF) is a program by the U.S. Department of Education. Eligible federal loan borrowers can receive full forgiveness of their Direct Loan debt after making 120 qualifying monthly payments while working full-time for a government agency or not-for-profit organization.
This opportunity is not available to private student loan borrowers. To find which type of loans you have, check your loan agreement or billing statement, or log in to your StudentAid.gov account using your Federal Student Aid (FSA) ID to view federal loan accounts.
What does consolidation mean for my loans?
A Direct Consolidation Loan allows you to replace one or more federal student loans with a new one under the Direct Loan program. Consolidating federal student loans can make sense in some instances, but you should be aware of potential drawbacks.
- Simplify your repayment plan: Having multiple student loans means numerous monthly payments. By consolidating your loans, you can simplify payment with just one monthly bill.
- Repayment flexibility: Consolidation loans offer repayment terms ranging from 10 to 30 years. Moreover, you can choose between a fixed monthly payment or a graduated payment, which starts low and increases over time. Depending on your budget, these options can give you the flexibility you need.
- Access to new programs: Not all federal student loans are eligible for income-driven repayment plans and forgiveness programs, including PSLF. In this scenario, consolidating could give you access to those benefits.
- Higher interest rate: Unlike refinancing with a private lender, consolidating your loans will result in a slightly higher interest rate. Your loan servicer will take the weighted-average rate of the loans you’re consolidating and round up the result to the nearest one-eighth of a percent.
- Longer repayment: Direct Loan Consolidation can increase the time you have left on your repayment term, which not only leaves you in debt longer but results in more interest charges over time.
- Potential loss of benefits: If you have certain benefits on your current loans—such as interest rate discounts, loan cancellation benefits, or principal rebates—you may lose those during consolidation.
How does consolidation affect my ability to qualify for PSLF?
Consolidation can affect your eligibility for PSLF. This depends in part on what type of consolidation you choose.
What type of student loan consolidation should I do for PSLF?
The answer is simple because there’s only one federal loan consolidation program. PSLF is only available for Direct Loans.
So if you have any of the following, you’ll need to use the Direct Loan Consolidation program to gain eligibility for the forgiveness program:
- Parent PLUS Loans
- Family Federal Education Loan (FFEL) program loans
- Perkins Loans
- Stafford Loans
- Loans from other federal programs
But traditionally, only payments that occur after you consolidate count toward the 120 monthly payments you must make to obtain forgiveness. So if you already have Direct Loans and have made qualifying payments toward forgiveness, consolidating will reset the clock, causing you to lose the progress you’ve already made.
The Department of Education temporarily remedied this problem with the limited PSLF waiver, which gave PSLF-eligible borrowers credit for all payments, including ones made before consolidation, with a one-time adjustment. If your loans are not Direct Loans, you can take advantage of this adjustment with an application for student loan consolidation for PSLF by May 1, 2023.
For Direct Loan borrowers, however, the waiver expired on October 31, 2022. In July 2023, the federal agency will institute a new policy to credit borrowers who consolidate with a weighted average of their qualifying payments before consolidation.
Should I consolidate if it means I have to wait longer for PSLF?
If you’re working toward PSLF, consolidating your federal loans could set you back in your progress toward your goal. But in some cases, it can still make sense:
- You have non-Direct Loans: The one-time account adjustment the PSLF waiver offers is good for federal loan borrowers who don’t have Direct Loans as long as they submit their Direct Consolidation Loan application by May 1, 2023.
- You’re still early in repayment: If you’re in your grace period or just started making monthly payments, the benefits of consolidating could outweigh the downside of losing credit for a few payments.
- You want access to income-driven repayment plans: If you’re having trouble making your monthly payments and your current loan program doesn’t offer income-driven repayment plans, consolidating can give you access to this valuable relief option. Unless you’re close to achieving forgiveness through PSLF, the benefit of more affordable payments can make losing credit for past payments worth it.
- You have loans in default: One way to get federal student loans out of default is to consolidate them. You can either agree to pay your new loan on an income-driven repayment plan or make three consecutive, voluntary, on-time, full monthly payments before you consolidate.
If you’re unsure whether consolidation is right for you, remember: Direct Loan borrowers who wait until July 2023 to consolidate can take advantage of the new program rules. Effective that month, these will allow you to take credit for the weighted-average number of your preconsolidation payments.
Are there alternatives to consolidation that enable me to qualify for PSLF?
If you already have Direct Loans, you don’t need student loan consolidation for PSLF. So unless you have an excellent reason to consolidate, it may be best to avoid it, at least until the new program rules go into effect in July 2023.
If you have non-Direct Loans, the only way to qualify for PSLF is through Direct Loan Consolidation. You can get credit for all your monthly payments if you submit your consolidation application by May 1, 2023.
Suppose consolidating right now would cause you to lose credit for past payments. Still, you want the other benefits of a Direct Consolidation Loan, such as payment flexibility and a more straightforward repayment plan.
In that case, you may consider the following:
- Get on an income-driven repayment plan, if available.
- Ask your loan servicer about deferment and forbearance plans.
- Set up automatic payments, so you don’t have to keep track of multiple manual payments every month.
- Talk to your loan servicer about a modified repayment plan.
Think carefully about your options, and consider reaching out to your student loan servicer for advice.
Author: Ben Luthi