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Four Errors That Can Make Federal Student Loan Consolidation A Mistake

For some borrowers, federal direct consolidation is an essential move. For others, it is a huge mistake.

Written By: Michael P. Lux, Esq.

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Affiliate Disclosure and Integrity Pledge

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 student loan consolidation is a powerful tool. The process can streamline repayment and help borrowers get their debt forgiven. Sadly, things aren’t foolproof. Mistakes with federal student loan consolidation can be costly.

Raising the stakes even higher is the fact that borrowers can’t fix errors after the fact. There is no way to “undo” a federal student loan consolidation.

Fortunately, most federal student loan consolidation mistakes are easy to avoid. Borrowers just need to be aware of the way things can go wrong.

The Big Mistake Made By Parent PLUS Borrowers

Parent PLUS loans are a great resource to pay for your child’s education.

While these loans are federal student loans, they come with limitations that do not apply to the other federal loans.

In repayment, Parent PLUS loans are not eligible for any of the Income-Driven Repayment plans. However, if consolidated, Parent PLUS loans can become eligible for the Income-Contingent Repayment (ICR) plan.

This wrinkle means federal direct consolidation is necessary for a large portion of Parent PLUS borrowers. However, the mistake comes if these borrowers include other federal student loans in the consolidation.

When other federal student loans get combined with Parent PLUS loans in consolidation, they lose important features.

For example, suppose a parent has Parent PLUS loans used for their children and Stafford loans from when they were a student. Combining all of the debt in federal direct consolidation would be a mistake. The Stafford loans would lose eligibility for repayment plans such as Revised Pay As You Earn (REPAYE). Instead of paying the 10% of discretionary income required under REPAYE, this parent would have to pay 20% because ICR would be the only option.

To avoid this problem, borrowers need to consolidate Parent PLUS loans separately from their other federal student loans.

Paying for Help

Within the world of student loans, some questionable “experts” charge money for helping borrowers with certain services.

Often they will charge a fee for filling out the FAFSA, signing up for income-driven repayment, or consolidating federal student loans. These services are all provided free of charge by the Department of Education and do not require any special training.

In many cases, the “expert” help amounts to nothing more than a scam.

The government has gotten better about shutting down these businesses, but they remain an issue.

Borrowers should certainly research their options when it comes to student loan consolidation. However, they shouldn’t pay anyone for advice or help with the process.

Delays and Restarting the Student Loan Forgiveness Clock

In most cases, the borrowers who need consolidation should do so immediately after finishing school.

A delay can mean losing progress towards student loan forgiveness.

As an example, a recent graduate might work for three years at a government agency. The three years of work could count towards the ten years required for Public Service Loan Forgiveness (PSLF). Consolidation erases the old loans and creates a new loan. The new loan means a new forgiveness clock.

The same issue applies to borrowers pursuing forgiveness under an income-driven repayment plan.

Borrowers that have been in repayment for several years need to carefully consider their options before federal direct consolidation.

Private Student Loan Refinancing

Refinancing student loans is technically a loan consolidation.

The refinance lender pays off old loans and creates a new loan. Borrowers refinance to get lower interest rates or better repayment terms.

Federal direct consolidation is a very different process. Borrowers don’t improve interest rates, but they consolidate to qualify for preferred government programs.

Unfortunately, sometimes refinance lenders still call their service consolidation.

Borrowers should understand that student loan refinancing is very different from federal direct consolidation. Don’t mistakenly refinance federal loans when you want to consolidate your federal loans.

Next Steps

  • Review your Federal Loans – Not sure if your loans are Parent PLUS? The federal government keeps a detailed record of all federal student loans.
  • Talk to your servicer – Federal student loan servicers should help with the consolidation process. Unfortunately, they occasionally make mistakes and give bad advice. Still, it is a good idea to discuss your plan to make sure you are not missing anything.
  • Consolidate through the Department of Education – There is only one place for federal direct consolidation.
  • Double-check the plan – Before consolidating, the Department of Education should provide borrowers with a list of loans to be consolidated. This is the last shot to prevent a permanent mistake. Take a close look to ensure only the necessary loans get included.
About the Author

Student 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.

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