Planning to Pursue PSLF? Think Twice About Direct Loan Consolidation

consolidate federal student loans

When you graduate from college, it’s common to walk away with several different types of loans from several different lenders. Each loan may have a unique interest rate, minimum payment, and due date. Paying down your student loans is hard enough without having to juggle all those payments and due dates.

One option that could make your life simpler is to consolidate federal student loans through a Direct Consolidation Loan. Consolidating your debt can streamline your repayment, but it can have serious consequences — especially if you’re pursuing Public Service Loan Forgiveness (PSLF).

Here’s what you need to know before consolidating your loans.

How PSLF works

If you have federal student loans, you may be eligible for PSLF. Under this program, borrowers who work for a nonprofit organization or government agency can have their loans forgiven after making 10 years of qualifying payments.

To be eligible for loan forgiveness, you must work full-time for your employer. If your loan servicer approved your application for an income-driven repayment (IDR) plan, you can make reduced payments while still qualifying for PSLF.

Depending on your salary and your loan balance, PSLF can help you save thousands. Use the PSLF calculator below to find out how much you could save.

Public Service Loan Forgiveness Calculator

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Only federal loans qualify for PSLF; private student loans are not eligible for loan forgiveness through the PSLF program.

Direct Loan Consolidation can affect PSLF

With a Direct Consolidation Loan, the government will consolidate your federal student loans into one. You’ll have just one interest rate (set at the weighted average of your previous loans), with one loan servicer and one monthly payment.

While pursuing PSLF, managing several different loans and due dates can be stressful. Consolidating your loans into one can sound appealing. However, Direct Loan Consolidation can have a big impact on public service forgiveness.

If you’re under an income-driven repayment plan or have made qualifying payments toward PSLF, consolidating your loans will cause you to lose credit for those payments.

For example, if you’ve made five years of payments before consolidating your federal student loans, those payments will not count after consolidation. You can still pursue PSLF, but the clock starts over when you consolidate your debt. Instead of being halfway to loan forgiveness, you’ll have to make another 10 years of payments to qualify.

If you’re on an IDR plan, that can mean you’re paying your debt for several more years. The extended repayment period means you’ll pay more out of your own pocket toward your debt, potentially costing you money you’d otherwise save.

When to consolidate federal student loans

Consolidating your loans can be a smart option, even if you’re pursuing PSLF. Direct Consolidation Loans can be a good idea in the following situations:

  • You’re still in your grace period or early on in your repayment: If you haven’t made payments yet or have just started, you can consolidate your loans without losing too many qualifying payments for PSLF. You can simplify your debt while still making progress toward loan forgiveness.
  • You want access to IDR plans: Some federal loans are ineligible 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. That way, you can reduce your monthly bill and have just one payment to manage.
  • 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 as long as 30 years, which can dramatically reduce your payments and make your loans more manageable.

Consolidation alternatives

In some cases, consolidating your debt doesn’t make financial sense. However, that doesn’t mean you’re stuck with multiple loans with many different servicers.

Another option to consider is private loan refinancing. With this strategy, you consolidate some or all of your loans into a new one through a private bank or organization. The new loan will have a different repayment term, interest rate, and payment.

Once you refinance your loans, you’re no longer eligible for PSLF or IDR plans. However, it can be a solution for you if you’re struggling to manage both federal loans and private ones, or if you want to pay off your debt ahead of schedule.

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If you’re considering a Direct Consolidation Loan to reduce your monthly bill and extend your repayment, you may be able to save money by refinancing instead. With refinancing, you may be able to get a more competitive interest rate.

Managing your student loans

If you’re struggling to keep track of all of your debt, deciding to consolidate federal student loans can simplify your payments.

However, before you pursue Direct Loan Consolidation, consider your public service forgiveness timeline. Make sure you understand all of the potential drawbacks before submitting your application to prevent any issues later on.

For more information about loan forgiveness, see if PSLF is right for you.

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