Planning to Pursue PSLF? Think Twice About Direct Consolidation Loans

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When you graduate from college, it’s common to walk away with multiple types of loans from 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 multiple bills.

One option that could make repayment simpler is consolidating federal student loans through a direct consolidation loan. Consolidating your debt can streamline your payments, but it can have serious consequences — especially if you’re pursuing Public Service Loan Forgiveness (PSLF).

Here’s what you need to know before considering direct student loan consolidation — specifically:

How PSLF works

If you have federal student loans and work in public service, 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 120 qualifying payments.

Only federal loans, not private loans, qualify for PSLF. To be eligible for loan forgiveness, you must work full-time. Make sure the work you’re doing qualifies you by filling out the Public Service Loan Forgiveness certification form. You must also have federal direct loans and make payments toward them under an income-driven repayment (IDR) plan.

Depending on your salary and your loan balance, PSLF can save you a significant amount. To find out how much you could receive in forgiveness, check out the PSLF calculator.

Direct consolidation loans can affect PSLF

Federal direct consolidation loans combine your federal student loans into one. You’ll have just one interest rate (set at the weighted average of your previous loans’ rates), 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. But if you’ve already made qualifying payments toward PSLF prior to consolidation, opting to consolidate 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 towards loan forgiveness, you’ll have 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’re pursuing PSLF. Consider it in the following situations:

  • You’re still in your grace period or early on in 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. Do so 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 as long as 30 years, which can dramatically reduce your payments and make your loans more manageable. But if a lower payment is your priority, choosing an income-driven plan might make more sense, since you’ll be eligible for forgiveness on the remaining balance after 20 or 25 years.

When PSLF isn’t worth it

PSLF isn’t right for everyone. The program requires working for 10 years in public service before loans can be forgiven. A lot can change in that 10 years, making PSLF a big commitment for those who are still uncertain of their career path. If you leave your public service career while working towards PSLF, you won’t be eligible for forgiveness.

Since you must be on an income-driven repayment plan to qualify, your payments will be reduced and your loans will accrue more interest than on other plans. If you leave the PSLF program but stay on income-driven repayment, you’ll still get forgiveness on the balance left over — but unlike under PSLF, that amount will be taxed.

It’s also worth noting that the PSLF program is still very new. The program was implemented in 2007, so the first borrowers to receive PSLF became eligible in 2017. It’s come under scrutiny, as only a handful of applicants have been approved for forgiveness so far.

Consolidation alternatives

Another option to consider is private student loan refinancing. 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 excellent credit and solid income to qualify.

Once you refinance federal loans, you’re no longer eligible for PSLF or IDR plans. However, refinancing can be an option for saving money on high-interest private loans, if you don’t plan to use federal loan benefits or if you want to pay off your debt ahead of schedule.

If you qualify, refinancing may result in a lower interest rate, while federal student loan consolidation is more useful for qualifying for certain repayment programs or reducing your bill by extending your repayment term.

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.

But before you pursue federal consolidation while working towards PSLF, consider your timeline. Make sure you understand all the potential drawbacks before submitting your application.

Jackson Wise contributed to this report.