Most college graduates walk across the stage with a diploma and a mountain of student loan debts. An Experian study finds that the average student loan balance is $38,792.
Whether you’re a new graduate or have been in the workforce for several years, student loan consolidation can help you pay off your student loans sooner or make your monthly payment more affordable.
Paying off student loans is necessary to become debt-free but the repayment strategies differ from consumer debt. In addition, there are several ways to qualify for federal student loan forgiveness and discharges when you can’t afford to pay off your loans.
Should I Consolidate My Student Loans?
Some of the potential benefits of consolidating student loans include:
- Qualify for federal repayment and forgiveness programs
- Lower interest rate (private refinance only)
- Convert variable rates to a fixed interest rate
- Smaller monthly payment
- One monthly payment and loan servicer
Consolidating your loans is easy but there are federal and private programs. Your loans may only qualify for one program (private loans are ineligible for federal consolidation loans) and each offers different benefits.
Federal loans can be eligible for federal or private consolidation although private student loans can only be consolidated through a private lender.
When Federal Student Loan Consolidation Makes Sense
Federal consolidation is only for federal education loans. So while this action doesn’t reduce your interest rate (it’ll actually be slightly higher), you can be eligible for income-driven repayment programs.
These programs can base your monthly payment on your current income and help you eventually qualify for loan forgiveness on your remaining balance.
You may decide not to consolidate if you’re already in an income repayment program and lose your qualifying payments toward loan forgiveness.
Federal consolidation becomes less attractive as your new interest rate is the weighted average of your existing loans plus 0.125%. So, your new interest rate APR is essentially 0.125% higher than your current rate.
When Private Student Loan Consolidation Makes Sense
Private lenders can refinance federal and private student loans. Consider this option if you want a lower interest rate and are willing to sacrifice the loan forgiveness and financial hardship benefits for your federal loans as they convert to a private loan.
Losing these benefits can be worth it if you have a stable income and want to reduce your interest costs by paying off your loans early.
Types of Loans Eligible for Consolidation
Which student loan types you have depends on which consolidation program you’re eligible for.
Federal Student Loans
Most federal student loans are eligible to become a federal consolidation loan.
Eligible loans can include:
- Direct Loans (Subsidized, Unsubsidized, and PLUS)
- Parent Loans for Undergraduate Students (PLUS)
- Stafford (Subsidized, Unsubsidized, and Nonsubsidized)
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Perkins Loans
- Nursing Student Loans
- Health Education Assistance Loans
- Health Professions Student Loans
Existing Direct Consolidation Loans and FFEL Consolidation Loans can also be eligible under qualifying circumstances.
One notable exception is that student loans for parents cannot consolidate with student-received loans. As a result, parents and students must consolidate separately.
Private Student Loans
Unfortunately, no private student loan is eligible for federal consolidation. However, it’s possible to refinance any private loan with a non-federal lender if you qualify for financing.
You can also refinance federal and private loans together.
How to Consolidate Federal Direct Loans
You must graduate, drop out, or change to below half-time enrollment to be eligible for federal consolidation. Your eligible federal loans must be in repayment status or under a grace period.
You can follow these steps to combine your eligible federal loans into a single Direct Consolidation Loan:
- Apply for a Direct Consolidation Loan online or by mailing a paper application
- Choose a consolidation servicer
- Complete the steps after your desired servicer contacts you
- Combine multiple loans into one loan
- Review your new interest rate, monthly payment, and repayment term
- Sign final loan documents
- Start your new payment plan
Unfortunately, you cannot convert private student loans to federal consolidation loans.
How to Consolidate Private Student Loans
You have more flexibility with private student loan refinancing as there are more lenders and more loans qualify.
- Compare rates and terms from multiple lenders
- Combine your desired federal and private loans
- Receive a new interest rate, repayment term, and monthly payment
- Start making monthly payments for your new loan servicer
You don’t have to refinance all of your outstanding loans. For example, you may omit loans with a lower interest rate or federal loans you plan to enroll in a forgiveness or financial hardship program.
Pros and Cons of Private Student Loan Consolidation
Here are the advantages and disadvantages of pursuing private consolidation instead of going the federal route.
- Potentially lower interest rate: You may qualify for a lower interest rate if you have good credit, a high income, or choose a shorter repayment length. A better rate means less lifetime interest which can save you money and help you get out of debt sooner.
- Most loans qualify: Many federal and private student loans in good standing are eligible to be in the same private consolidation loan with one monthly payment.
- Cosigner release: Refinancing may allow a cosigner to be released from your existing loans if you have qualifying credit and income.
- Flexible repayment terms: You may be able to extend the life of your loan up to 20 years. This helps you get a smaller and more affordable monthly payment. However, an extended-term usually results in more total interest.
- Lose federal student loan benefits: Federal student loans undergoing private refinancing permanently lose their repayment, forgiveness, and forbearance benefits.
- No loan forgiveness programs: Private lenders do not offer income-based repayment plans or loan forgiveness options if you experience hardship during repayment.
- May not qualify for better rates: You may not be eligible for a better interest rate if today’s best refinancing rates are higher than your current rate or if you’re not a well-qualified borrower.
Reasons Why You Shouldn’t Consolidate Loans
You may not decide not to consolidate federal or private student loans for these three reasons:
- Lose Perks: Federal loans have exclusive repayment and forgiveness benefits that help borrowers with limited incomes or physical hardships. If you anticipate needing these benefits, keep these loans in the federal system for now.
- May Pay More: Extending your repayment term to get a budget-friendly monthly payment means you pay more interest overall. However, this extra cost can be better than missing payments or defaulting on your loans which can require credit repair.
- Interest Rates: Federal consolidation loans add a 0.125% APR to your weighted average interest rate. Additionally, you’re not guaranteed to qualify for a lower APR through a private lender.
Student Loan Repayment Plans
Federal student loans are eligible for several different repayment plans with different monthly payment amounts and payoff dates.
- Standard: The standard repayment period for all federal student loans is 10 years. As this is the shortest payment plan, it has the highest monthly payment but can also have the lowest borrowing costs.
- Extended: You’re eligible for the Extended Plan when you have at least $30,000 in qualifying loans. The repayment period is 25 years and you can either have fixed or graduated monthly payments.
- Graduated: The Graduated Plan can have a repayment term from 10 to 30 years. Your total repayment period depends on your total student loan indebtedness. You start with a lower monthly payment that increases every two years.
- Income-Based (IBR): An IBR plan caps your monthly payment to be between 10 and 15% of your discretionary income. Depending on your loan type, any remaining balance is forgiven after 20-25 years of payments.
- Income-Contingent (ICR): An ICR plan adjusts your monthly payment to either be 20% of your discretionary income or the amount you would pay over 12 years based on your income, whichever is lower. Any remaining balance is forgiven after 25 years.
- President Obama’s Pay As You Earn (PAYE): The PAYE and REPAYE programs reduce your monthly payment to 10% of your income. Your remaining balance is forgiven after 20 years (undergraduate) or 25 years (graduate).
If you’re eligible for an income-driven repayment plan, your monthly payment won’t exceed your standard monthly payment if your income increases to a sufficient level.
The U.S. Department of Education has a loan simulator that can help you compare your repayment options. Your loan servicer can also help you enroll in an appropriate plan.
Student Loan Forgiveness & Discharge
You can also get out of student loan debt through federal loan forgiveness programs when you have a qualifying income or vocation. However, these programs typically require between 10-25 years of qualifying payments.
The federal COVID-19 payment pause on principal and interest payments can also count toward the loan forgiveness requirements even.
It’s also possible to discharge your loans due to qualifying hardships like permanent disability, school closure or fraud, and potentially bankruptcy.
Is Student Loan Forgiveness Taxable?
Unfortunately, your forgiven or discharged amount can still be subject to income taxes. But the tax treatment differs by program and it’s worth reviewing the program rules and speaking with a tax advisor.
As well, all student loan forgiveness and discharges are tax-free through 2025, thanks to the American Recovery Act passed in March 2021.
What is Student Loan Forgiveness?
Student loan forgiveness is when your remaining loan balance cancels after a specific number of years of qualifying payments or working in a particular career field.
As a reminder, only federal student loans are eligible for forgiveness. Private loans may only be forgiven or discharged due to extreme hardship.
To be eligible for loan forgiveness, you will also need to consolidate your loans into a qualifying loan type (usually a Direct Consolidation Loan) to qualify for loan forgiveness. Doing so extends your repayment term from 10 years (Standard Plan) up to 30 years.
Most student loan forgiveness programs are operated through the U.S. Department of Education. States may also offer loan forgiveness for high-demand career fields that need more workers.
How to Get Your Student Loans Forgiven
Here are some of the most popular programs that forgive student loans by working for certain employers.
Public Service Loan Forgiveness Program (PSLF)
The PSLF program can be the most accessible initiative to qualify for as it applies to many career fields. It also has a short 10-year repayment period (120 payments). As another benefit, the forgiven balance is non-taxable.
You can be eligible if you work for a federal, state, or local government agency. Federal military service and non-profit employment qualify too.
Typically, this program applies to Direct Loans only. Thankfully, the Limited PSLF waiver extends to forgiveness benefits when you enroll FFEL and Perkins Loans by October 31, 2022.
Teacher Loan Forgiveness Program
The Teacher Loan Forgiveness Program (TLF) forgives up to $17,500 in Direct and FFEL loans (subsidized or unsubsidized). Your forgiven balance is tax-exempt.
You teach for five complete and consecutive years at qualifying schools to qualify.
This program can be better than PSLF if you have a small loan balance as you can receive forgiveness sooner.
Loan Forgiveness for Nurses
Several different nurse loan forgiveness options exist. You might consider these two programs first as they are available nationwide:
- Nurse Corps Loan Repayment Program (NCLRP): Receive up to 60% reimbursement after working two years at a “critical shortage facility” or as nurse faculty at eligible nursing schools. A third year of qualifying service can result in a total of 85% forgiveness.
- National Health Service Corps (NHSC): Complete two years of qualifying service and get up to $50,000 for full-time service or $25,000 for part-time service. Additional benefits are available with one-year extensions.
Loan Forgiveness for Military
There are a couple of different military loan forgiveness programs.
Public service loan forgiveness (PSLF) might be the best option as your military service counts toward forgiveness.
Other programs can cover education costs to become a military doctor or nurse. Other critical career fields can be eligible for forgiveness or partial repayment after a minimum number of years of service.
Federal Perkins Loan Cancellation
The last Perkins Loans were issued on September 30, 2017, although cancellation programs still exist. Several paid and volunteer sectors qualify.
It’s possible to receive up to 100% cancellation by reaching these service milestones:
- 15% canceled for the first and second years of service
- 20% canceled for the third and fourth years
- 30% canceled for the fifth year
The canceled amount also includes your accrued interest.
Qualifying Perkins Loans Forgiveness Jobs
These paid and volunteer positions can be eligible for Perkins Loan cancellation benefits:
- AmeriCorps VISTA volunteer
- Child or family services agency
- Law enforcement
- Librarian (with a master’s degree at a Title I school)
- Military service
- Nurse or medical technician
- Peace Corps volunteer
- Professional provider of early intervention/disability services
- Public defender
- Speech pathologist (with a master’s degree at a Title I school)
Income-Based Repayment Plan (IBR) Loan Forgiveness
The income-based repayment plans have a 20 to 25-year repayment window before your balance is forgiven. While it takes a long time, some relief can be better than nothing if you’re cash-strapped.
The loan forgiveness debate varies by program:
- IBR Plan: 20 years for new borrowers after July 1, 2014 (25 years for existing borrowers)
- ICR Plan: 25 years
- REPAYE Plan: 20 years for undergraduate and 25 years for graduate loans
- PAYE Plan: 20 years
Usually, the forgiven amount for income-driven loans is taxable. But your forgiven amount is tax-exempt through 2025, thanks to pandemic-era legislation.
Student Loan Discharge
You may also be able to discharge your loans due to qualifying hardships. This debt relief measure may apply for federal and private student loans.
It may also require a court order requiring the lender to discharge your remaining balance. For example, you might be able to release your federal or private student loans during bankruptcy if the judge determines paying off your loans will bring excessive financial hardship.
However, a bankruptcy discharge is relatively uncommon as the proceeding look to get rid of your secured loans and consumer debts first. Additionally, federal loans are more likely than private student loans to be forgiven during bankruptcy.
Typically, student loan discharges are taxable but a tax holiday is in effect through 2025.
Circumstances for Student Loan Discharge
These are some of the most common reasons that student loans qualify for a discharge:
- Permanent disability or death: A permanent or total disability that has lasted five years (60 months) or will last at least five years with physician certification. A borrower’s death can also be a qualifying event.
- Victim of identity theft: Loans taken in your name and with your information by somebody else.
- Unauthorized signature by the school: Your school may have forged your federal loan documents.
- False certification of student eligibility: The school may have approved loans you weren’t eligible for at the federal or state level.
- Unpaid refund: You might get a partial refund if you withdraw from school before completing the program.
- School closure while you’re enrolled: Your school may close while you’re an active student, on an approved leave of absence, or withdraw within 120 days from the closing date.
The discharge application process is different for each option regarding what proof you must provide.
There can also be different post-discharge procedures to prevent post-discharge fraud. For instance, a disability discharge has a three-year evaluation period to verify your household income and health situation still qualifies.