When you graduate from college, it is common to come away with several types of loans from different lenders. Each loan can have a unique interest rate, minimum payment, and maturity date. Paying off your student loans is hard enough without having to juggle multiple bills.
One option that could simplify repayment is to consolidate federal student loans through a direct consolidation loan. Consolidating your debts can streamline your payments, but it can have serious consequences, especially if you opt for Public Service Loan Forgiveness (PSLF).
Here’s what you need to know before considering a direct student loan consolidation, specifically:
How the PSLF works
If you have federal student loans and work in the public service, you may be eligible for the PSLF. Under this program, borrowers who work for a non-profit organization or government agency can have their loans canceled after making 120 qualifying payments.
Only federal loans, not private loans, are eligible for the PSLF. To be eligible for the forgiveness loan, you must be working full time. Make sure the work you are doing qualifies you by completing the Public Service Loan Remission Certification Form. You must also have federal direct loans and make payments under an income-based repayment plan (IDR).
Depending on your salary and your loan balance, PSLF can save you a significant amount of money. To find out how much you could receive in forgiveness, consult the PSLF calculator.
Direct Consolidation Loans May Affect PSLF
Federal direct consolidation loans combine your federal student loans into one. You will have only one interest rate (fixed at the weighted average of the rates of your previous loans), with a single loan manager and a single monthly payment.
While pursuing PSLF, managing several different loans and deadlines can be stressful. Consolidating your loans into one might sound appealing. But if you have already made qualifying payments to PSLF prior to consolidation, choosing to consolidate your loans will cause you to lose credit for those payments.
For example, if you made five years of payments before consolidating your federal student loans, those payments won’t count after consolidation. You can still sue PSLF, but the clock starts again when you consolidate your debt. Instead of being halfway to canceling the loan, you will need to make another 10 years of payments to qualify.
When to Consolidate Federal Student Loans
Consolidating your loans can be a smart option, even if you go for the PSLF. Consider it in the following situations:
- You are still in your grace period or at the start of your repayment: If you haven’t made any payments yet or are just getting started, you can consolidate your loans without losing too many PSLF-eligible payments. You can simplify your debt while progressing towards loan cancellation.
- You want to access IDR packages: Some federal loans do not qualify for IDR plans. To get around this rule, you can consolidate your loans into a direct consolidation loan and then apply for an IDR plan. This way, you can reduce your monthly bill and only have one payment to manage. Do this immediately after graduation to make sure you start on the path to forgiveness as early as possible.
- You need a lower monthly payment: When you take out a direct consolidation loan, you can choose a new repayment period. You can opt for a loan with a term of up to 30 years, which can significantly reduce your payments and make your loans more manageable. But if a lower payment is your priority, it may make more sense to choose an income-oriented plan, as you will be eligible for a discount on the remaining balance after 20 or 25 years.
When PSLF is not worth it
The PSLF is not for everyone. The program requires 10 years of civil service work before loans can be canceled. Much can change in these 10 years, making the PSLF a great commitment for those who are still uncertain of their career path. If you quit your career in the public service while working for the PSLF, you will not be able to claim forgiveness.
Since you must have an income-based repayment plan to qualify, your payments will be reduced and your loans will accumulate more interest than other plans. If you exit the PSLF program but stay on the income-based refund, you’ll still get a discount on the remaining balance – but unlike the PSLF, that amount will be taxed.
It is also interesting to note that the PSLF program is still very recent. The program was implemented in 2007, so the first borrowers to benefit from the PSLF became eligible in 2017. It is under intense scrutiny, as so far only a handful of applicants have been accepted. approved for a discount.
Another option to consider is the private refinancing of student loans. With this strategy, you consolidate some or all of your loans into a new one through a private lender. The new loan will have a different repayment term, interest rate, and monthly payment. You need good or great credit and a solid income to qualify.
Once you refinance the federal loans, you are no longer eligible for the PSLF or IDR plans. However, refinancing can be an option to save money on high interest private loans, if you don’t plan to use the benefits of federal loans, or if you want to pay off your debt sooner than expected.
If you qualify, refinancing may result in a lower interest rate, while federal student loan consolidation is more useful in qualifying you for certain repayment programs or reducing your bill by extending your repayment term.
Manage your student loans
If you’re struggling to keep up with all of your debt, deciding to consolidate federal student loans can simplify your payments.
But before you continue with federal consolidation while working towards the PSLF, think about your timeline. Make sure you understand all of the potential drawbacks before submitting your application.
Jackson Wise contributed to this report.