Student Loan Consolidation, Payment Plans, and Forgiveness

Why Consolidate Your Student Loans?

For some student loan borrowers, consolidation can be a useful tool as part of their repayment strategy. It takes an assortment of loans—with potentially different rules and eligibilities—and converts them into one, simplifying repayment and could enable the borrower to apply for things like Public Service Loan Forgiveness. Last year’s Limited Waiver Opportunity gave a host of borrowers unprecedented access to PSLF, allowing them to count payments made on previously ineligible loans—like FFELs—so long as they converted them into a Direct Consolidation Loan, and even more borrowers could benefit under the IDR Account Adjustment.

Consolidation = a New Loan & a New Payment Plan?

When consolidating your student loans, some may fail to realize that they are, in the process, essentially taking out a new loan to replace old ones. Under normal circumstances—the Limited Waiver Opportunity notwithstanding—that means that benefits enjoyed under their old loans may no longer apply. For example, your new Direct Consolidation Loan will need a repayment plan, which will require that you file a new application for that loan, and you may not qualify for the plan your loans used to be on, such as if your income has increased. That’s just one reason, among many—including more opportunities for processing mistakes!—that we don’t recommend borrowers consolidate unless they have to. Further, income recertifications have been frozen due to the Covid-19 National Emergency Forbearance, but that doesn’t apply to those needing a new IDR plan following consolidation. 

Consolidation under the IDR Account Adjustment

Early next year, borrowers on IDR plans will have their payments recounted under a federal account adjustment. Those with FFEL loans will see all previous payments counted towards IDR Forgiveness, or Public Service Loan Forgiveness, if they consolidate their loans into a Direct Loan by the end of 2023. Borrowers may consolidate all their loans—Direct Loans and FFEL loans—into a Direct Consolidation Loan, which will count their highest number of existing qualifying payments towards forgiveness. Normally, consolidation resets your qualifying payment count back to zero, but this one-time recount could help many borrowers make a leap towards forgiveness.

Consolidation can be a lifeline for many, and opens up pathways to forgiveness through programs like PSLF. While it seems simple, however, make sure you have all the facts first: you can’t turn back and un-consolidate your loans. If you’re wondering whether consolidation could be the right choice for you, consult your student loan professional before you take any action.