Consolidating your federal student loans into a Direct Loan can give you access to various income-driven repayment plans and Public Service Loan Forgiveness (PSLF) opportunities.
However, federal student loan consolidation isn’t quite the same as going the private route. Only certain types of loans are eligible to consolidate, and various rules and regulations apply.
Knowing which public loans qualify for consolidation and how to go about it can save you money in the long run.
Which loans are eligible for federal student loan consolidation?
Several federal student loans can be consolidated, including:
- Subsidized and unsubsidized Direct Loans
- PLUS Loans (Grad and Parent)
- Perkins Loans
- Federal Nursing Loans
- Health Education Assistance Loans
If you want access to income-based repayment plans, where you can calculate your monthly loan balance according to the amount of money you earn, your newly consolidated Direct Loan will qualify.
A federal consolidated loan is also necessary to sign up for PSLF. This program forgives all student loan debt after 120 repayments for people working in eligible jobs in the public service or nonprofit sectors.
Keep in mind, federal student loan consolidation isn’t quite the same as private loan consolidation, especially with interest rates.
Even though federal rates are capped, borrowers may receive a higher interest rate on their consolidated loan than on their previous loans. That’s because the new Direct Loan will have a weighted APR. Your payments, however, may be lower since the new loan’s life is extended.
How are FFEL loans affected by Direct Loan consolidation?
Federal student loan consolidation can be convenient. However, for some loans that combine public and private loan elements, it can get tricky.
If you have a Federal Family Education Loan (FFEL), federal student loan consolidation can affect your repayment and loan forgiveness status. You may lose some FFEL benefits as well.
What’s more, FFEL loans are basically defunct now. They were private loans with federal backing that were no longer offered in 2010 when Direct Loans were introduced. Unfortunately, some FFEL features didn’t transition into the Direct Loans lending process.
Keep in mind, FFEL loans won’t qualify for loan forgiveness their own. So if you’re still paying off an active FFEL balance pre-2010, you’ll need to consolidate to a Direct Loan if you want to qualify for loan forgiveness.
However, none of the payments you’ve made under an existing FFEL loan repayment will count towards the 120 timely payments needed for full loan forgiveness. After you consolidate your FFEL into a Direct Loan, the number of “timely” payments you’ve made will start from zero.
Depending on the private lender who granted your FFEL loan, certain benefits, discounts or other perks attached to your loan may be lost after consolidating to a Direct Loan. Examine your options to see if these are something you’d like to give up if you’re close to paying off your loan balance.
Should you go for Direct Loan consolidation?
Here are some questions you should ask yourself if you’re considering consolidating several federal loans into one Direct Loan.
Will you be happy paying more interest?
A Direct Loan won’t carry the lowest interest rate of one of the loans you’re consolidating. It won’t even be an average percentage. It’ll be weighted or rounded. This could add on about 0.125% in interest.
Can you reasonably aim for forgiveness with an FFEL loan?
If you make 120 timely payments on your consolidated Direct Loan, you qualify for forgiveness. One payment each month equates to about 10 years of payments until your balance is eliminated.
If you had an FFEL loan, that may mean making extra payments on top of the ones you’ve already made in order to fulfill this requirement.
Should you go for all, some or nothing?
You don’t need to consolidate all of your federal loans.
Examine the ones that are harder to manage, set a budget, and take advantage of using a loan calculator to estimate what your consolidated Direct Loan payments will look like.
Can federal student loan consolidation help your debt?
Loan consolidation is technically like a reboot of your active loans. Doing so can get one or more loans out of default, saving you from falling further into debt and ruining your credit.
However, remember that federal student loan consolidation can add several collection fees to your balance. Borrowers should carefully ask themselves if this is a price they’re willing to pay to get out of default.
If you still have other questions about your loans and federal consolidation, visit your account in the National Student Loan Database. Or, contact your lenders for more information, especially if you have an FFEL loan and want to proceed with consolidating it the right way.
If you’d like to consolidate your federal student loans, click the button below to get started.
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