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The Sherpa Mailbag: Federal Government Consolidation Planning and Strategy

Michael Lux Blog, Consolidation, Mailbag, Student Loans 2 Comments

Dear Sherpa,

Let me start by declaring my determination: I will NOT let a student loan ruin the rest of my life.  My student loan will be in excess of $300,000.00 thanks to interest accruals by the time I am able to find a job and begin making payments.  I am currently earning below poverty level, so no payments are required or even possible at this time.  However, this will not always be the case (hopefully the employment tide will turn for me soon).  I am putting together a strategic plan for managing my student loan once I have a source of income.  Consolidation seems like a logical first step, but I am overwhelmed by the complexity and frustration potential of the process (your website provided the clearest information I’ve seen).  I also do not fully understand the concept of consolidation.  Is the point of consolidating to get all of your loans at the same interest rate?  All of my loans are federal (some Graduate PLUS) and all are currently with Sallie Mae.  If I apply for consolidation, will all the loans still be federal and will they all still be with Sallie Mae?  I want to ensure that after consolidation I will still be able to take action on my next strategic step, which is to find work with a non-profit/government employer and invoke the “120 qualified payments” forgiveness plan.  Despite my best intentions to repay what I owe, I am not deluded into thinking that a full repayment will ever be possible (I am 45 years old).  That being the case, do you think it would be easier for me to not consolidate and just work toward the 120 qualified payments?  However, if consolidating would show good faith and provide me with some benefit (for example making the Graduate PLUS loans part of the amount that gets forgiven) in the future, I’m all for it. What do you think?

– Fred

There are a ton of great questions here, so I will address them one by one.

What is consolidation?

Student loan consolidation is a way of taking many different loans and combining them into one loan.  It is a somewhat lengthy process, but fairly straightforward.  Whoever is consolidating your loans will reach out to your current lenders to determine the cost of paying off the existing loans.  If you have 3 loans that you are consolidating, your consolidator will pay off those 3 loans on your behalf.  Once the three old loans are paid off, you will just be responsible for paying back the one new loan that was required to pay off all of your old loans.  With private loans, this is a good way to lower your interest rate, and extend the length of repayment.  It can be a good way of lowering your monthly costs.

What is the point of Federal Government Consolidation?

Federal government consolidation is slightly different than private loan consolidation.  Unfortunately, you are not able to “lower” your interest rates.  When the government consolidates your federal loans, they calculate a weighted average of interest rates, so that your combined interest rate does not change.

The advantage to consolidating federal loans is two-fold.  First, it puts all of your federal loans in one location.  Secondly, and more importantly, certain federal loan programs do not qualify for public service loan forgiveness.  By consolidating, you can combine them into a loan that is eligible.

As always, it is important to not forget the golden rule of student loan consolidation when you are combining your loans.

Will my loans still be federal and will they still be with Sallie Mae?

As long as all of the loans that go into your consolidated loan are federal, the new loan will be federal.

Where they end up can vary.  Before I address this question, I feel I should first remind you that this is something you really have no control over.  The company that services your loans is at the discretion of the federal government, and it can change whenever they feel like it.  Its frustrating, but totally out of your control.  The good news is that all servicers have to play by the same rules.  The same repayment plans are available, and the same programs are available.  Admittedly, quality of service can vary, but again you have little to no control on this subject.

I have heard several different explanations on where the loans actually go, so I will just relay what I have been told.  One representative told me that when you consolidate your loans, you can state your preference and they will try to accommodate it.  Having been through the consolidation process myself, I can tell you that I never really got this opportunity.  However, I did all my consolidation online, so doing it over the phone might be different.  I’ve also been told that the servicer will be the company that was already servicing most of your loans.  In the case of the few consolidations that I have personal knowledge, this was the case.  This approach would also seem to make the most sense.

Finally, I have also been told that myfedloan handles all of the people who submit payments under the public service loan forgiveness program.  I haven’t seen any loans change servicers on this basis, but it is certainly possible.

Do you think it would be easier for me to not consolidate and just work toward the 120 qualified payments?

This is not a one or the other situation.  You are allowed to consolidate and work towards your 120 qualified payments.  In fact, I think you should definitely consider consolidation first.  The Grad PLUS loans that you have may not be eligible for public service forgiveness, but if you consolidate them, they might be.  (Double check with your records and your lender).  Secondly, by consolidating, you only have to submit your public service info to one loan provider.  Similarly, if you consolidate, submitting IBR or PAYE paperwork is significantly easier because you won’t have to do a weighted calculation of your payments.

Final thoughts

Being 45 and sitting on 300k in loans is a very difficult position to be in.  I really admire your determination not to let student loans ruin the rest of your life.  That being said, it is important to remember that it is a lot of money, and it should definitely be factored into life decisions that you make.  I think working towards public service loan forgiveness is a wise idea, if you can find qualifying work.  Talk through each and ever step with every company you work with.  It will be tedious, I know it was for me, but with this much money at issue, you want to dot every i and cross ever t.  You seem to be asking the right questions and really putting in the effort.  I think any time you invest researching and educating yourself on this subject is well spent.  Good luck!

If you have questions or think I missed something, please let me know.