The central theses
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- By consolidating federal student loans that are not currently eligible for debt forgiveness, you may qualify for debt forgiveness.
- To be eligible for this one-time benefit, you must apply for consolidation by the end of June 30th.
- You can consolidate your loans online. The process takes about 30 minutes.
If you have federal student loans that aren’t eligible for debt forgiveness programs, you can apply today until you consolidate your student loans, which may increase the amount you can have forgiven.
The Department of Education is currently reviewing the number of past student loan payments as part of a one-time adjustment. This adjustment could increase your number of payments so you may be eligible for forgiveness sooner under a qualified income-driven repayment plan or another program such as Public Service Loan Forgiveness. If you have federal student loans that were previously ineligible for debt forgiveness programs, you can take advantage of these one-time benefits by consolidating them before midnight on June 30 (local time).
There’s a lot of confusion about student loans in the news right now. With parts of the Biden administration’s SAVE repayment plan on hold, you may be wondering if it’s still worth consolidating your student loans.
Experts say yes.
“The consolidation period for the one-time IDR adjustment will not be affected by the court decision,” said Elaine Rubin, higher education finance and policy expert and director of corporate communications at Edvisors. “The U.S. Department of Education will continue to count eligible payments to qualify borrowers.”
While consolidation is beneficial for most borrowers, it’s not the right move for everyone. Here’s whether this one-time consolidation option could maximize your debt relief and whether you should consider it.
Read more: If you have defaulted on your student loans, you may qualify for this debt relief program
What is student loan consolidation?
Student loan debt consolidation is similar to debt restructuring. It allows you to convert your existing federal student loans into a new loan with a fixed interest rate.
Why should you do this? If you have FFELP, Perkins, or other non-direct federal student loans, they may not be eligible for debt forgiveness programs. By consolidating them into a new direct loan and entering into an income-driven repayment plan, you may be eligible for automatic loan cancellation, interest forgiveness, or other debt forgiveness benefits.
“Consolidation increases the number of payments that count toward forgiveness and synchronizes your forgiveness date.”
If you qualify for an IDR plan and have made payments for 20 to 25 years, your entire balance could be automatically forgiven.
And there are other benefits to consolidating loans. Having only one student loan to keep track of, rather than many, can also make managing payments easier. Depending on the payment plan you choose, a consolidation loan can lower your monthly payments, but it can also extend your repayment period. However, if you qualify for debt relief after consolidating, this may not be a big problem.
Even if you already have direct loans, consolidating could benefit you if you have several with different repayment starts, says Mark Kantrowitz, a financial assistance expert and member of CNET Money’s Expert Review Board.
Private student loan companies also offer debt consolidation for student loans. While these programs may offer lower interest rates or other perks, converting your federal student loan to a private loan rarely makes sense. Private student loans are not eligible for federal income-based repayment programs or federal debt forgiveness.
Read more: Have you fallen behind on your student loans? You may qualify for this debt relief program
Will my interest rate increase if I consolidate my student loans?
If your federal student loan currently has low interest rates, in most cases you won’t have to worry about a jump in your new consolidated interest rate.
According to Federal Student Aid, the Department of Education’s official website for student loans, the interest rate on your new Direct Consolidation Loan is based on a weighted average of the loans you consolidated and is rounded up to the nearest eighth of 1%.
There is one exception, however. If you have an FFELP loan, you could lose some benefits when you consolidate. “The main problem is borrowers who get a big rate reduction from the FFELP lender,” Kantrowitz said. “Those discounts are provided by the lender and disappear when you consolidate the loans.”
You don’t have to consolidate all of your loans, so you can exclude your FFELP loans if you want to keep your current discount. You’ll need to weigh whether you qualify for forgiveness and how consolidation might affect your monthly student loan payment to decide if consolidation is right for you.
If you have unpaid interest on a student loan, it will be capitalized when you consolidate the loan and could increase your principal balance. Take this into account when deciding what your new monthly payment should be and how much you might qualify for in forgiveness.
I don’t know if I’m eligible for student loan forgiveness. Should I still consolidate my loans?
For many borrowers, consolidating their federal student loans will help lower their monthly payments and maximize their potential debt relief. If you currently have federal student loans that aren’t Direct Loans, this can be especially beneficial. Consolidation can also help you lock in a fixed interest rate if one of your federal student loans has a variable interest rate.
The newest student loan forgiveness program takes into account the date of your first student loan payment. Consolidating your loans can help ensure that you receive credit for your new Direct Loan starting from your previous loan payment date.
So let’s say you graduated from college and made your first repayment on a federal student loan in 2004. You later went back to school for a second degree and started repaying those loans in 2010. Under an income-driven repayment plan with a 20-year debt repayment period, you could be eligible for forgiveness of your 2004 loans this year. But by consolidating your newer loans with your older ones into a new Direct Loan, your entire balance could be paid off this year.
Even if you’re a recent graduate, consolidating your federal loans and enrolling in an IDR can help you gain access to debt relief faster. And if you only have one student loan that isn’t a Direct Loan, consolidation can also be beneficial.
However, if you are not eligible for debt relief, this step may not make sense. “If you are not currently seeking any type of debt relief (e.g., not even IDR debt relief) and expect never to seek debt relief, you do not need to do this,” Kantrowitz said.
Will the June 30 deadline be extended?
Although the Department of Education extended the loan consolidation deadline this spring from April 30 to June 30, experts do not expect another extension to occur.
“The extension for consolidation has not changed and is not expected to change or be extended further,” Rubin said. If you can benefit from consolidating your loans, you should apply soon.
How to consolidate your student loans
You can consolidate your federal student loans online at StudentAid.gov. To meet the deadline, you must submit your application before midnight local time on June 30. You can consolidate after that date, but you would miss out on some benefits.
To complete the application, you will need your Federal Student Aid ID, some personal information, financial information, and credit information. The FSA website says it takes about 30 minutes to complete the application to consolidate your loans.
You can complete the application now at studentaid.gov/loan-consolidation.
Once you submit your application, it may take up to 60 days for your consolidation to be processed, Kantrowitz said. In the meantime, your student loan payment meter may drop to zero. Don’t panic if that happens. It just means your adjustment meter is being worked on.
What happens if you miss the deadline?
If you consolidate your loans after the June 30 deadline, you can still get credits for past Direct Loan payments. But you may not get as much credit. Instead, your payment number would be based on a weighted average or reset to zero. But you could still get access to a debt relief program.
