Federal direct consolidation is an essential move for some student loan borrowers and a huge mistake for others.
Written By: Michael P. Lux, Esq.
Last Updated: January 27, 2024
Temporary Forgiveness Clock Rule: The Department of Education is conducting a one-time update of IDR payment counts. Borrowers who consolidate their federal loans before June 30, 2024, can maximize progress toward PSLF and IDR forgiveness.
Federal direct student loan consolidation isn’t easy to navigate. Deciding if you should consolidate your loans is a critical step in planning a repayment strategy.
In most cases, federal student loan consolidation benefits those who need to resolve eligibility issues . For some, consolidation can be a pathway to qualify for student loan forgiveness or income-driven repayment plans.
In this article, I’ll go over the essentials of federal direct loan consolidation, along with many useful tips to maximize the benefits of consolidation.
At its core, federal student loan consolidation involves merging multiple federal loans into a single loan.
To better understand the complex rules and details of student loan consolidation, it’s helpful to view it as a transformation process. Essentially, it turns old federal loans into a new one. While this often means combining several loans into one, borrowers also have the option to consolidate just a single loan.
This emphasis on “transformation” is important because the outcomes can vary greatly. Some borrowers make a mistake and transform a loan they might like into a lousy loan. Other borrowers use consolidation wisely and transform a flawed loan into a better federal loan.
What makes a good loan or a bad loan is all about perspective and circumstances. To best illustrate how to navigate this transformation, let’s look at some examples of what to do and what to avoid.
A prime example of wisely using federal direct consolidation involves Federal Family Education Loan Program (FFELP) loans. Before 2010, these were issued by private lenders but guaranteed by the federal government. While they mostly functioned like federal student loans, they had certain restrictions.
One key limitation is that FFELP loans aren’t eligible for Public Service Loan Forgiveness (PSLF). But, by consolidating them into a federal direct loan, they become “federally held” loans, which then qualify for more forgiveness programs.
Another smart consolidation move is for Parent PLUS loans. These loans are not eligible for income-driven repayment plans or PSLF. However, converting them into a federal direct loan through consolidation makes them eligible for the Income-Contingent Repayment Plan and student loan forgiveness.
These consolidation strategies are beneficial for many borrowers because they transform loans with limited federal program access into ones with broader eligibility.
Nevertheless, it’s important to remember that this transformation isn’t always the best course of action.
One major misstep in Federal Student Loan consolidation occurs when a borrower combines a Parent PLUS loan with other federal student loans. As mentioned earlier, consolidating a Parent PLUS loan alone can make it eligible for the Income-Contingent Repayment (ICR) plan. However, if this loan is combined with other federal loans, the new consolidated loan becomes ineligible for more favorable repayment plans like IBR, PAYE, and SAVE.
This misstep could end up costing the borrower a significant amount of money and is arguably one of the biggest blunders one can make with Parent PLUS loans.
Due to a potentially harmful outcome from consolidation, borrowers must consider program eligibility and progress before consolidating. While consolidation is a crucial step in some scenarios, it can be a huge mistake in others.
The actual process of federal direct consolidation is very simple.
The Department of Education will process all of the paperwork electronically. They estimate that filling out the form takes about 30 minutes.
Borrowers should be wary of third-party student loan consolidation services. Often masquerading as legitimate companies, these entities are better described as scams. They falsely claim to have a special connection with the Department of Education and offer assistance in qualifying for Income-Driven Repayment Plans and Student Loan Forgiveness. In reality, these companies are just middlemen who charge for their services without adding any real value. In many cases, they end up making errors and making the process even more difficult than necessary.
These companies have gotten so bad that at the top of the Department of Education’s Student Loan Consolidation information page, it displays the following:
As long as borrowers stick with the official Department of Education Student Loan Consolidation page and are careful only to consolidate when necessary, the process is relatively simple.
Other than deciding which loans to include in the consolidation, borrowers will also need to consider their repayment plan options. One of the options will allow borrowers to pick the plan with the lowest monthly payments. However, because multiple plans may have the same low monthly payment, borrowers should research their preferred repayment plan before consolidating. There are several repayment options that borrowers should consider.
Many borrowers who choose to consolidate may have already made progress toward loan forgiveness under Public Service Loan Forgiveness or IDR forgiveness.
Historically, consolidating meant restarting the “forgiveness clock” at zero.
Student loan consolidation and refinancing are terms that are often confused or used interchangeably, but they refer to different processes. Some lenders that offer student loan refinancing label their services as consolidation, which can add to the confusion.
Here’s an easy way to distinguish the two:
Consolidation may result in two loans instead of one – Federal consolidation typically is presented as a way for borrowers to combine all of their federal student loans into a single loan. Many borrowers will end up with two separate loans if they consolidate. This is because the Department of Education keeps the subsidized loans separate from the unsubsidized.
Consolidation is one of the rare opportunities to switch federal servicers – During the student loan consolidation process, borrowers have the option of selecting their preferred loan servicer.
The credit score impact is minimal – When borrowers consolidate their loans, there might be a slight change in their credit score. For some, the score may increase because the old loans are marked as paid in full, and it’s often better for credit to have one larger debt instead of many smaller ones. However, for others, the score might decrease if their student loans were the oldest accounts on their credit report, as the average age of credit is a factor in credit scoring. Overall, consolidation doesn’t typically cause significant shifts in credit scores. The financial savings from consolidation are generally a more substantial benefit.
Hold off on Consolidation if you are about to buy a house – A ton of major changes on a credit report can cause some concern with mortgage companies. Borrowers who are about to buy a house should discuss consolidation with their mortgage company before starting the process.
The consolidation process can take months – Filling out the form may only take 30 minutes, but the actual process may take months. To consolidate, all of the old loans must be paid off in full, and doing this math takes the Department of Education some time. Don’t be surprised if there are some minor issues with this process.
After the math has been done, the borrower should receive a letter giving them one last chance to opt out of the consolidation. Though no action is required from the borrower during this time, the consolidation process is a bit time-consuming.
Consolidation can be used as a way out of default – Borrowers who have fallen way behind on their student loans can use consolidation as a quick fix to get out of default. However, borrowers also have the option to rehabilitate their loans before consolidation. There are several factors borrowers should consider when deciding between rehabilitating and consolidating their defaulted loans.
Private loans cannot be included in a federal consolidation – Being able to transform a private student loan into a federal government loan would be great, but it is not an option.
There is no minimum credit score or income requirement – Unlike refinancing with a private company, all federal borrowers are allowed to consolidate their federal loans. There is no credit check.
About the AuthorStudent loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.
Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.
Michael is available for speaking engagements and to respond to press inquiries.
The Latest Upates from The Student Loan Sherpa:
I have 2 student loans through FFEL one subsidized and one unsubsidized and I consolidated them a LOOOONG time ago as I was told back then it would lock in a low interest rate (currently 4.75%). I also remember being told consolidation was a once in a lifetime thing, meaning I could only do it once. As I am understanding the rules, I need a consolidated loan owned by the Dept of Education, and mine is FFEL currently owned by a loan servicing company. It sounds to me like I would only qualify for forgiveness if I consolidated my current FFEL loans under ED, but that would change my interest rate and restart the clock as far as payments I have made to date? I have been working for Social Services for 16 years and making payments for at least 10+ years. Am I even allowed to consolidate my loans a second time and would it be beneficial to do so or would it cause more problems? Reply
These are all excellent questions, and somewhat tricky to answer. First, the consolidation clock issue is a tricky one. In the past, it did restart the clock. Fortunately, new rules came along that changed that unfair rule. I’d encourage you to read this article about loan consolidation and the forgiveness clock. This already complicated subject is made a little more complicated by the recent SAVE litigation. The latest status of the case is that all SAVE regulations are temporarily blocked, which would include the new rule regarding student loan progress toward forgiveness in a new consolidaiton loan. Ultimately, because you have FFEL Loans, consolidation will be required to qualify for PSLF. It is possible that it would change your interest rate (they revert back to the original interest rate from when you borrowed your loans). However, it would also make you eligible for the new SAVE plan, which could save you a considerable amount of money each month, if it survives the lawsuit. To answer your last question, you are allowed to consolidate. As for whether or not it is worth it, I can’t say for certain. I’d lean toward yes, but that is the type of thing that requires more information and a longer discussion. Reply
Terrence Connergood afternoon, I paid off my consolidation loan about 15yr ago and now I have a perkins loan saying I owe them, trying to find out if it legit and if so why they were not paid in the consolidation. Reply
That is a tricky one to answer without knowing a bit more information. To dig into it further, I’d suggest you first take a look at the Department of Education records. They keep a complete database of all federal loans which should include any Perkins loans. Reply
Terrence Conner Hey Michael, ok thank you, I will check it out Terrence ConnerGood morning Michael, I found the loan but how can I get in touch with someone because I did a consolidation of all my loans and when I look at the history it show activity in 2004 and then nothing until 2021 as a forbearance and there is no way I was on a forbearance for almost 20yrs, how can I get this resolved? Best Regards
That is a strange sequence. Were you able to pull the history from the NSLDS that I linked to in the earlier comment? It should explain it there. That said, even if you were on forbearance that entire time, you should still get credit toward forgiveness when the one-time adjustment happens.
Hey Michael, I currently have two sets of student loans. The first is actually in my dad’s name, and they were Parent PLUS loans that we consolidated years ago, and are currently on a standard payment plan with Aidvantage. So it is currently classified as a “Direct Unsubsidized Consolidation” loan which paid off the Parent PLUS loans. The second are a collection of federal subsidized and unsubsidized loans in my name, which are not consolidated and are on the new SAVE plan with Nelnet. In an ideal world, I would like to find a way to get my dad’s loans onto the SAVE plan somehow, to take advantage of the various benefits (especially to prevent interest from accruing). They currently don’t seem eligible as is, and the double consolidating loophole seems to require two or more federal loans in his name to do implement. Are there any other pathways to get his loan onto a SAVE Plan? Reply
Sadly, short of your dad taking out another loan, I don’t see a path to use the double consolidation loophole to get the debt eligible for SAVE. Outside of that one exception, the best he can do from an IDR standpoint is the ICR plan, which doesn’t have the interest subsidy you are looking for. In that situation, the best you can do is to make sure you don’t miss any income certification deadlines so that the extra interest doesn’t capitalize. Reply
I figured as much. Regardless, I really appreciate you clearing it up. This whole article has been enormously helpful!
If I did a loan consolidation on FFEL loans on 4/28/24 then sent a form to add my Parent Plus Loans on 4/30/24 by email to the loan servicer, did I make the deadline? Can my Parent Plus loans be added even though they were not on my original consolidation request? Reply
That is a great question Jim. Given that there is an important 4/30 deadline to consider, I can see why you went the route you did. I’m not aware of any particular rule governing this situation. What I will say is that this is a question best directed toward the servicer who is consolidating your loans, which likely means Nelnet or AidVantage (AidVantage handles the consolidation process for MOHELA and EdFinancial). I’d suggest directing your quesiton to the appropriate servicer. Make sure they understand why it is so important that the application date still be 4/28 or 4/30. Last thought: mixing Parent PLUS loans with other loans comes with some risks and concerns, but with the one-time adjustment it might be a good idea. Not knowing your situation at all, I’ll defer to your judgment for your strategy. Reply
I have 2 Stafford Direct unsubsidized loans in the SAVE plan. I was in PAYE but was eligible to switch to SAVE a few months ago. I’m also part of the PSLF program and about 36 payments away from PSLF forgiveness. I make one payment each month that gets split between the two loans. The Mohela loan tracker indicates that the two loans currently have 75 qualified payments each and I’m about to certify more payments. Is there any value in consolidating these two loans? There’s an interest difference between them but I’m less concerned about that and more concerned that the consolidation could reduce my qualified payments even with the penalty lifted. I just don’t want that to happen. I’m not fortunate enough to have made 150 payments instead of 75, am I? (just wishful thinking). Thanks! Reply
Great question. Usually there wouldn’t be a benefit because your loans are both direct, and both eligible for SAVE and PSLF. However, if they have different payment counts, such as one with 75 and the other with 85, you could consolidate them by April 30 to take advantage of the one-time IDR count adjustment update. That would bring your total up to 85 thanks to the temporary clock rules. Reply
I have unsubsidized FFEL loans that have been delinquent for almost 20 years. They have not appeared on my credit report for many years. I signed up for Fresh Start and the IDR Plan and my loans were transferred. I know that due to their age, they will not be reported to the credit bureau even after transferring to IDR. However, if I decide to consolidate before 12/31, will this mean the consolidated loan will now appear on my credit report? Or does the original delinquency date still apply to a consolidated FFEL, so that it won’t be reported? I’d like to avoid credit reporting if possible. Reply
Even though it is old debt, a direct consolidation loan is a brand new student loan. I’ve never seen the exact scenario you are describing before, but I can’t imagine a situaiton where the new consolidated loan wouldn’t get reported to the credit bureaus. Reply
I have regular student loans, sub and unsub. I owe 27k left out of 72k and was thinking of consolidating them. If I pay the loan off in 5 years instead of the 20 years, do I save on interest or do will I have to pay the interest as if I took the 20 years to pay? I cant find a direct answer to this. I know if I keep it the way it is, I dont have to pay the interest if I pay towards principle excessively each month. Reply
There are a couple of items to hit here. First, you can pay extra. There are not prepayment or early repayment penalities. Your monthly bill is the minimum payment, not the maximum. Second, interest is charged daily based on your account balance. The more you pay, the smaller your balance will be and the less you will spend on interest in the long run. Reply
Hi – I’ve read everything I can on this but still have a question. In 2018, to be eligible for REPAYE, I consolidated my FFELP loans together. At the time, my Grad PLUS loan was already eligible for at least PAYE, if not REPAYE. It also had the highest interest rate, so I left it alone. Once my FFELP loans were consolidated into a Direct loan, the clock I guess restarted on my qualifying IDR payments. However, my Grad PLUS loan has about 7+ years of repayment in an IDR plan. My question is should I now consolidate my Grad PLUS loan with my Direct loans before the end of the year while there is a pause on resetting the clock for consolidation, and before the count is adjusted for my other loans? From what I’ve read, it seems that the loan with the longest period of qualifying payments/repayment would overrule the others. So if I consolidated them all into a new Direct loan, once the count adjustment was made, the whole loan would then have 7+ qualifying years of repayments. Is this correct? Thank you! Reply
You definitely sound like a good candidate for taking advantage of the one-time IDR count adjustment. Combining everything so that you can get the maximum amount of credit is probably the smart move here. I’d encourage you to give your servicer a call to talk through the process. I’d also suggest that you estimate what your payment count should be once everything is completed. This will make it easier to identify any errors when they do the update next year. Reply
Johnny JoxanasHi
I have Consolidated the plus loans, a few years ago.
Do The payments that I made before the consolidation count towards the 20 or 25 years of forgiveness?
Also .. how it is determined 20 or 25 years and who does it?
Respectfully
Johnny J Reply
The progress toward forgiveness for your loans will probably be updated early next year. I’d suggest reading up on the IDR payment count update for full details. The 20 or 25-year question depends on a couple of factors. First, the plan selected. Some plans, like PAYE, offer forgiveness after 20 years. Others, like ICR, require a full 25 years. Second, some plans are 20 or 25 years, like SAVE. For these plans, borrowers with only undergraduate debt qualify for forgiveness after 20 years, and those with graduate loans can get forgiveness after 25 years. Reply
Hey Michael! I don’t think I have seen this question asked this specifically on this thread. I have A big variety of loans, Direct Sub, Direct Unsub, Direct Grad Plus, and then I have (3 total) FFELP Unsub, and FFELP Sub. I am wanting to apply for the SAVE IDR plan, and trying to weed through all the details, especially when it comes to consolidation and interest. I know that I will need to consolidate the FFELP loans to a Direct Consolidation Loan to be eligible for SAVE, but my question is do I just consolidate those 3 loans and leave my direct sub/unsub and Grad Plus loans alone, or should I consolidate all the loans with the FFELP loans and just have 1 big loan? is it even possible to consolidate just 3 loans and keep the rest individual and still qualify for SAVE? This is my thought for why consolidating the direct loans might not be the best idea but I cannot gain clarity on how this will work, so hoping you can provide some insight.
If and when I consolidate a loan, I know that whatever interest I have now will be added to the principle, and then will be a higher amount that the new interest rate will be compounding on. Do you think that matters long term if they will be forgiven in 25 years? Or could that potentially make even more interest accrue, resulting in a higher loan amount. My goal long term would be pay the least amount monthly based on my income (the SAVE plan), while still trying to keep the amount that will be forgiven as low as possible too for when I will have to pay income taxes on it once forgiven. Thanks for any insight you have! Reply
Great questions and comments! It sounds like you have really done your homework on this one. I’ll add a couple of nuggets of info that may apply to your situation, and that might help make the decision easier. First, you may want to consolidate all of the loans if some of the loans have a higher IDR count than other loans. Second, your interest might get capitalized even if you don’t consolidate. For example, if you are on IBR, your interest will capitalize when you switch plans. Given the mix of loans that you have, I’d also encourage you to reach out to your servicer with this question so that they can verify your eligibility for the two options you have outlined. I know wait times are long right now, but they have access to your full loan information and should be able to help. Given the level of research you have already clearly done, it should make the conversation much more productive. Reply
I am not set to re-certify my IBR plan until next year (my income has increased a lot) but I need to consolidate to old FFEEL loans onto SAVE plan. When I consolidate, it asks for my income, how soon does the take effect since I know the actual consolidate can take time. Essentially, when should I consolidate? No or closer to deadline Reply
That is an interesting dilemma, Danielle. When you consolidate, you pick a new repayment plan, and it sounds like yours will be headed up no matter what IDR plan you pick. I can see why you would want to wait until the very last second to take advantage of the IDR Count Update. The technical rule on that deadline is that you need to submit the application by 12/31/23. That said, I wouldn’t want to cut it that close, but that is because I’m pretty risk-averse. I don’t see a clear answer that is definitely the right approach. If it were me, I’d probably submit my application to consolidate in early November to give myself plenty of time to address any issues that might arise. However, I can see an argument for doing it now and for waiting until the last second. Have you discussed this issue with your servicer? They might have some insight into processing times, and they may even have some thoughts on the ideal strategy given your circumstances. Reply
I have a Parent Plus loan with Navient and during the course of this loan they have steered me in the wrong direction with forbearance 2 times w/o realizing the extra cost of this and I am now owing 71,200 and it seems to never do down. Can I consolidate into a Federal Consolidation Loan and apply for loan forgiveness because it was for my daughter and she is a teacher in qualifying schools for over 15 years? Reply
Hi Mary. Unfortuantely for PSLF, the important detail is the occupation of the borrower, not the person the loan was borrowed for. Reply
I have FFEL loan with Navient, and I didn’t realize the loan was not eligible for interest freezes or other benefits announced for federal loans. Is it a good idea to consolidate FFEL to a federal direct loan so I can benefit from the $10,000 loan forgiveness announced by Biden on 8/24/22? Reply
We are still waiting on the full details of the forgiveness, but that sounds like a good plan. At the very least, you can benefit from the 0% interest and no payments until 2023. Reply
I work for a non-profit. I’m a recent hire and it’s my first non-profit job post-graduation. I have FFEL loans and have made about 7 years worth of IRB payments toward the 25-yr forgiveness. What happens to those 7 years of payments if I choose to consolidate to a Direct Consolidation Loan? Maybe I’ll work for the non-profit for 10 years and be eligible for public service forgiveness. But I don’t know what the future holds. Does Direct Consolidation erase my progress toward IRB forgiveness? Reply
Normally it would restart the clock, however, right now, it won’t due to temporary programs. The limited waiver on PSLF allows borrowers to consolidate their FFEL loans without losing credit for previous payments. The IDR count update should also mean that your progress towards 25 years doesn’t restart either.
TR WilliamsI have a $29k, PPL for my daughter that loan payments started in 2013 or 2014. Is there a Federal Student Loan program available that she can apply for which allows her to convert the PPL to her name and then eventually take advantage of Loan Forgiveness? Reply
Federal rules are consistently changing, but as of right now, no such option exists. ReplyI thought I had everything for the Teacher Student Loan Forgiveness – qualifying teacher, qualifying school, 5 years, etc. I just found out I was denied because they said I had an outstanding balance in 1998 before I consolidated my loans. Reply
Susan HernandezI have a two private loans with Navient. I have paid the majority of my loans off over the years. Since these are private loans I understand that I am not eligible to qualify for Public Service Loan Forgiveness.
I have worked in Public Service for 20 years.
I thought refinancing with Sofi was going to get me a Direct Consolidation loan but I was mistaken. Still private loan.
Is it possible to to move my private loan to a Direct Consolidation loan so that I can eventually qualify for PSLF? If that’s the case what company/organization/bank does that? I’m so frustrated with the confusing information and lack of help from my private loan company. I’d appreciate your assistance. Thanks! Reply
Hi Susan, That is a great question. Unfortunately, the options to convert private loans to federal loans are extremely limited. Based upon what you are describing, I don’t really see a path to PSLF under the current rules. I’m sorry I don’t have any better news for you. Reply
Hello Michael,
Should I consolidate my Navient (FFEL) loan individually into a Direct Consolidation Loan OR consolidate my Navient loan AND my Direct Unsub Consolidation Student Loan together into one Direct Consolidation Loan? What would be the best thing for me to do to qualify for the TPSLF program and to possibly receive a refund for my Direct Unsub Consolidation Loan payments? I have made payments on the Navient loan since 2004 and I have made payments on my Direct Unsub Consolidation Loan since 2017. Reply
With the changes announced last month, I think consolidating your FFEL loan is probably a good idea. I’d also note that TEPSLF isn’t necessarily your only option for forgiveness. The limited waiver announced last year could be the best option, assuming you are woking in public service. Reply
Are you available to do a fee based consulting for my wife’s student loans? The FFEL loans are serviced by Navient and my wife teaches public high school (TCLI). I’m want to defer the payments till May and then hopefully have them forgiven. However, Navient keeps giving conflicting information and I simply don’t have the time to navigate this maze. Happy to pay $250hr to get me aimed in the right direction. Reply
Hi Jim, I appreciate the offer, but I’m not available to take on individual clients. However, based upon your description of your situation, I’d encourage you to investigate the limited waiver on Public Service Loan Forgiveness. Additionally, if you consolidate your FFEL loans into a federal direct loan, the loans should qualify for the interest and payment freeze that will last until May, and could get extended long. Reply
Denise ClarkI’ve been paying on my student loan for over 14 years and still have a balance that I’m hoping can be considered for forgiveness. My confusion is that the loan is with AES. I know that to be considered for the public service loan forgiveness I need to consolidate that loan with a direct loan servicer, which I’m not 100 percent sure ‘who’ is considered direct vs private. My main question, however, the Biden Admin forgiveness must be with a federal student loan servicer, so if I would consolidate to the direct loan servicer will both the public service forgiveness and Biden forgiveness be okay for consideration? Also, can you give me an idea of federal direct loan servicers?
If you follow the link to federal direct consolidation, you can fill out an application with the Department of education. As part of your application, you can pick your next servicer. I’d suggest picking MOHELA because they handle all of the PSLF people.
So I have an FFEL loan I’ve been paying on well over 10 yrs and my employer qualifies for PSLF.
My kid recently graduated college and I have about $12K PLUS Loan which I have not started paying on yet due to the President’s payment waivers (so far).
My question; Should I consolidate my PLUS Loan with FFEL and then apply for PSLF? Will I be eligible? I ask because I have not made any payments on the Plus loan so would the clock start over?
Or do I just concentrate on consolidating FFEL?
If I consolodate just the FFEL now would I be able to consolodate the PLUS loan(s) at a later time? Reply
Consolidating the FFEL Loan with the PLUS loan is probably a mistake. If you include a Parent PLUS loan in a direct consolidation, it limits the repayment options. Additionally, Parent PLUS loans are not included in the limited waiver that will help your FFEL loans get forgiven, potentially as soon as you consolidate. However, you may eventually want to consolidate your PLUS loans in order to get them eligible for PSLF. Reply
In order to take advantage of the new waiver, is it better to consolidate just the FFEL loans or to consolidate them with my direct loans that were already eligible for pslf?
It might be better to consolidate your FFEL loans with your existing direct loans. If the loans have different payment counts, the consolidated loan will get credited as having the higher payment count. However, I’d encourage you to work with your servicer to make sure that there are not any other issues with your strategy.
