When you consolidate your federal student loans with the federal government, your old loans cease to exist.
Instead, 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. Consolidation can negatively impact your progress towards loan forgiveness.
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 Federal Student Loan 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.
Put another way, consolidation is a vehicle to turn some federal loans that are not eligible for PSLF into an eligible loan.
Another reason that people consolidate their federal student loans is to 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 streamline monthly payments. 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
In the past, consolidation restarted the forgiveness clock to zero. Now, that isn’t necessarily the case, thanks to some new rules.
However, consolidation still comes with risks because some loans can essentially act as a poison pill and hurt eligibility for all of your debt. Parent PLUS loans are one example of a loan that is potentially dangerous to consolidate with direct loans.
Consolidation can improve your repayment plan and certain program eligibility, but it can also eliminate progress. It will all depend on the forgiveness you seek, your loan types, and your loan balances. There isn’t always an easy answer.
Don’t Make Assumptions
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 knowledgeable, 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, REPAYE, or IBR payment plans, and income changing over the years, it is hard to project exactly how much each option will cost.
Even though it is a challenge, 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.
8 thoughts on “Federal Consolidation and the Student Loan Forgiveness Clock”
Someone on FB posted a screenshot of his consolidation in process. In that screenshot, there was a notice in clause J stating that “any payments made on the loans that I am consolidating before the date of consolidation will not count toward the number of years of qualifying repayment for PSLF, etc.”. Huh!
I have been in the public loan forgiveness program and have 16 more payments left to forgiveness on my under grad loans. I have 115 payments left on my graduate loans. My loan servicer said if I consolidate before Oct 31st 2022 I would not lose the credit for the 109 payments already made and all my loans would be forgiven after the 16 payments I have left. This is not what the application says and my servicer will not put this in writing. Is this written anywhere?
I wish I had something definitive for you. But what you are being told sounds accurate in terms of the limited waiver. If it is, that is a huge break for you.
As far as definitive language, here is what the Department of Education says in the PSLF Limited Waiver FAQ:
“Assuming your repayment history overlaps for each loan, the consolidation loan will be credited with the largest number of payments of the loans that were consolidated. For example, if you had 50 qualifying payments on one Subsidized Stafford Loan and 100 qualifying payments on another Subsidized Stafford Loan and you consolidate those loans, you will receive 100 qualifying payments on the new Direct Consolidation Loan.
If your repayment history does not overlap for each loan, the consolidation loan may be credited with more total payments than the loan with the largest number of payments.”
What are the situations where consolidation doesn’t restart the clock? You had mentioned that starting the clock over was “a general rule?
Hi Toby – I’m not aware of any exceptions to the general rule. That phrasing had more to do with the fact that I know of many borrowers who consolidated and then had to restart the path towards forgiveness. I’d like to see the Department of Education policy change on this particular rule. The fix could look something like Temporary Expanded Public Service Loan Forgiveness, where borrowers who were on the wrong repayment plan were able to count that time towards forgiveness.
How where can I find a date to document?
When did the clock start on forgiveness on the IBR plan?
They track it by the month, so the goal is tallying 120 months.
Once you start working for a PSLF employer, it is best to send in an employer certification form to make sure everything is in order. That is the best way to verify that the clock has started.