student loan forgiveness clock

Federal Consolidation and the Student Loan Forgiveness Clock

Michael Lux Blog, Consolidation, Student Loans 0 Comments

When you consolidate your federal student loans with the federal government, your old loans cease to exist, and you have a brand new consolidated loan.  For people who are seeking student loan forgiveness, being smart about consolidation is critical.  In some cases, not consolidating would be a huge mistake.  In other cases, consolidating could result in years of extra payments and thousands of dollars lost.  Often the decision comes down to the student loan forgiveness clock.  Sometimes consolidation resets the clock, others it gets it started for the first time.

Today we will be discussing instances where consolidating is the smart move, and when it is a dumb move.  We will also discuss how to decide where your particular situation falls.

The Smart Consolidation

Some student loans are not eligible for student loan forgiveness.  The classic example would be FFEL program loans that many students borrowed as Graduate Plus loans prior to 2007.  Many of these loans are not eligible for the Public Service Student Loan Forgiveness program.  The interesting wrinkle is that they are eligible to go into a federal direct consolidation loan, and that loan is eligible for public service forgiveness.  If most of your debt falls into this category, getting it consolidated would be a smart move.  Once the loans are consolidated, you can start making payments on the new loan and your forgiveness clock starts.

Another reason that people consolidate their federal student loans is reduce the number of companies they have to deal with.  If you are dealing with 3 or 4 different federal loan servicers, consolidating your loans into one could make your monthly payments and yearly IBR or PAYE income certifications easier.  While this does have advantages, it is critical to make sure that you don’t consolidate for less paperwork and end up with a dumb consolidation…

The Dumb Consolidation

As a general rule, when you consolidate, the forgiveness clock reverts back to the lowest number.  For example, suppose you have three loans.  Loan A has 36 months worth of eligible payments, Loan B has 24, and Loan C has 12.  If you consolidate loans A, B, and C into consolidated loan D, that new loan will have only 12 months worth of eligible payments.

As a result of this rule, you have to weigh the advantages of the consolidated loan against the payments that will not count towards forgiveness because the the clock rolling back.

A key step

There are tons of different federal loans out there will lots of different rules at play.  This is a huge decision that requires lots of double checking to make sure you do it right.  Conversations with your student loan servicer are an essential step.

That being said, it is also very important that you fact check everything you are told.  It is easy to misunderstand something, and many servicers have been known to make mistakes about what they tell you.  These companies have huge call centers, so if you get someone who doesn’t seem very knowledgable, call back and hope you get someone better the next time.

Loan servicers are often hesitant to communicate in writing, but to the extent you can, having an email chain to prove what you were told is a good idea.

Deciding for yourself

Figuring out what is the best route can be tricky.  With most people on PAYE or IBR payment plans, and income changing over the years, it is hard to project exactly how much each option will cost.  That being said, give it a try anyway.  Make a spreadsheet tracking what your income and your payments will be and then compare the consolidation versus the not consolidating route.  You may be surprised to learn that sometimes chasing student loan forgiveness is the more expensive route.

To find your best route, research, talk to your servicer, and then do the math.  Unfortunately there are no simple answers or shortcuts.