You might be in the middle of finding your first job or struggling with student loan payments. If that’s the case, it may be beneficial to consolidate some of your federal loan obligations and take advantage of interest rate discounts. Ask your lender about the different types of federal loans, and what terms you can expect to receive from each one.
There are seventeen different types of federal loans that are offered by the federal government, and you can consolidate them all into one loan payment. There are three different ways to make decisions on which type of federal loan you’ll take advantage of: 1) Guaranteed by the government, 2) Loans guaranteed by the government with private lenders backing them up, and 3) a combination of the two.
You just graduated from college and decided to consolidate your federal student loans. They know it’s easier to manage a few loans than dozens. You have also heard that you can choose the loan servicer of your choice.
Even if you think you know how to consolidate student loans, you can easily make a big mistake because of the complexity of the US student loan system. Why am I saying this? Financial aid offices are the gatekeepers of student loan debt in America. They offer you credit options that often amount to a form that they make you sign without much discussion.
If you are entitled to debt relief, taking out a non-conforming loan is an expensive mistake. And taking out loans from private companies would be an even bigger disaster. Yet it happens all the time.
In this guide to federal student loan consolidation, we tell you how to consolidate federal student loans that your financial aid office shouldn’t have given you.
Advantages and disadvantages of federal student loan consolidation
Before looking at how to consolidate federal student loans, it is important to understand what you can gain or lose by doing so. Some of the main advantages and disadvantages of federal student loan consolidation are
Benefits from consolidation of federal student loans
One of the main advantages of a consolidated direct loan is that you may be entitled to more income-driven repayment plans (IDR) or cancellation schemes. Several types of state guaranteed loans are not eligible for IDR or Public Service Loan Forgiveness (PSLF) schemes, but may be eligible after consolidation. We will discuss this in more detail later.
You may also find that your monthly payments are lower after consolidation. Depending on the balance of your studies, the maximum repayment period for the Direct Consolidation Loan can be up to 30 years.
If you currently have federal loans with variable interest rates, taking out a federal consolidation loan allows you to secure a fixed rate loan at today’s almost always low interest rates. Finally, you have the option of taking out a federal loan with the company of your choice (we recommend Great Lakes).
Consolidation of federal student loans
Many borrowers are disappointed to learn that the Department of Education does not offer the same interest rate for consolidated direct loans as it does for new student loans. Instead, your interest rate is determined by taking the weighted average of all consolidated loans and rounding it up to one-eighth of one percent.
If you want to lower your interest rate, your only option is to refinance your student loan with a private lender. Of course, you generally need to have at least a good credit score to refinance your loans and an excellent credit score to get better terms. In addition, once you refinance, you are no longer eligible for federal student loan benefits (e.g. IDR or PSLF plans).
Since you are taking out a brand new loan when you consolidate, your repayment terms are set to zero. This means you will lose credit for any eligible payments you have already made under the IDR plan or PSLF rebate.
Finally, it’s important to note that the total cost of your repayment will likely be higher after consolidation. The first reason is that you will repay the loan over a longer period of time. And second, if any of your loans have accrued unpaid interest, that interest will be capitalized upon consolidation.
How to consolidate federal student loans
It is important to note that there are many companies that charge a fee to help you consolidate your loans. These companies have nothing to do with the Department of Education. It’s surprising that many federal student loan scammers charge borrowers more than $1,000 when the process is so easy to do yourself.
If you know you need to consolidate, follow the steps below to do so electronically (or you can download a paper application here):
- You go to studentloans.gov and think you see everything you owe the federal government.
- Click on the Consolidate My Loans link to begin your application for a Federal Direct Consolidation Loan. You will see a list of everything you need. Highlight all the loans you want to consolidate.
- Make sure you have no federal loans with other service providers. Sometimes they do not appear in the full list.
- Manually add to the consolidation any loans that are eligible but not shown (e.g. Perkins or any of the following loans).
- Choose a repayment plan, a credit management company (this is the only time you can choose who will manage your loans. If you do not plan to participate in the PSLF program, we recommend choosing Great Lakes) and ask them to process the application immediately.
- Download all your income information from the tax office.
- Agree to all the information, sign the draft and send it to your spouse for signature if you are married.
Federal student loans don’t have to cost you anything because there are no application fees. The whole process usually takes one to two months. If you have any questions, please call the Student Support Center at 1-800-557-7394.
Consolidation of federal student loans for Stafford and Grad PLUS loans
The most common types of student loans in the US are Stafford loans (direct subsidized and unsubsidized loans) and Grad PLUS loans.
It is these three types that are most often included in the consolidation of federal student loans. Remember that Stafford and PLUS loans can be either FFEL loans (issued before 2010) or direct loans (primarily issued after 2010).
FFEL loans must be consolidated to access more repayment programs. Direct loans may not be consolidated. But there are sometimes advantages to it.
The best reasons to consolidate a Stafford or Grad PLUS student loan into a Direct Consolidation Loan are:
- Streamline federal student loan debt into fewer items
- Choose the student loan service of your choice.
- Reduce the risk of errors in processing payments for federal student loans.
- If Stafford or PLUS loans were made before 2010, you may be eligible for new installment plans and Public Service Loan Benefits (PSLF) if the loans were made under FFEL and not Direct.
You shouldn’t combine Stafford and Grad PLUS loans if you’re
- have already repaid income-contingent loans
- You need additional deferral options (you have up to three years before consolidation and up to three years after for direct loans).
- Plan to refinance your loans within six months
How your financial support service can seriously harm you through incompetence
I recently came across a case where a dentist received about $60,000 in specialized medical loans through one of the random student loan servicing companies. These loans did not appear in the list of its debts in the NSLDS statement.
An interest rate of 5% was granted. And she decided that she needed to repay this debt. She thought it was essentially a private loan.
This is where the traditional way of thinking about debt can really get you into trouble. The staff of the financial aid department thinks the same way: Hey, we could use a Stafford loan like that, but instead of giving him 6.28% degrees PLUS high application fees, we should give him an alternative federal debt with a lower interest rate!
It’s even worse when they have the same mentality but give private loans to students. I recently had a physical therapist who had taken out a six-figure personal loan from a major bank. Had she taken out federal student loans, she would have been eligible for forgiveness.
But the financial aid office convinced her that a lower interest rate would help. Now it is based on the repayment of a six-figure debt that could have been written off. This is bad advice.
Ask me about your student loans
Example with credits for medical students (HPSL) and credits for disabled students (LDS)
In the case above, where the school offers an alternative federal loan, it works like this: members of certain professions can take advantage of fancy federal loans. Two common examples are credit for medical students (HPSL) and credit for students with disabilities (LDS).
These credits can be earned in a medical school, for example. Of course, if you have a private practice and your total debt is modest, these student loans will be right for you. No interest is charged until the end of the grace period and the closing costs are much lower.
But here’s the stumbling block: HPSL and LDS loans cannot qualify for PAYE, REPAYE or PSLF unless they are consolidated. If you can’t consolidate them, they are treated as personal loans. Congress created these programs through legislation such as the Health Professions Education Promotion Act of 1963 and the Health Improvement for Disadvantaged Minorities Act of 1990.
In 2007, they passed a major student loan reform that created all of the current loan forgiveness programs. And they didn’t think to refer to this old legislation. For example, an underrepresented, low-income student may end up in medical school with a stack of HPSL or LDS credits.
Let’s say my client, a dental student, graduates from college and goes to work at a 501c3 hospital. Their Stafford loans entitle them to PSLF after 10 years. Your HPSL or LDS credits will not be issued. In contrast, his non-disadvantaged counterpart receives a Direct Grad PLUS loan. You happen to be qualified for the PSLF. Thus, if it does not consolidate one of these unsuitable loans for the PSLF, it could save a few thousand dollars in interest, but cost $100,000 or more in principal repaid.
Other student loans you did not know you could consolidate
I hope you felt my outrage. I find it appalling that if this client had not consulted us, she would never have known that her medical business loan could be consolidated and qualify for debt forgiveness.
If you can get your debt forgiven and pay less than you owe, the interest rate obviously doesn’t matter much. This traditionalist approach to debt repayment is one of the most common causes of student loan errors we see.
In addition to the loans already mentioned, here are the other types of student loans that can be combined into a direct consolidation loan. I have added some abbreviations for you to ask your loan officer.
- Additional loans for students
- Federal Perkins loans (generally, it is better to consolidate Perkins loans than to cancel them).
- Credits for nursing students
- Ready for the nurses
- Assistance loan for health education (HEAL)
- Credit for medical students (HPSL)
- Loans for disabled students (LDS)
- Federal Family Education Loan Scheme (FFEL) Plus Loan
- FFEL consolidation loans and direct consolidation loans (only under certain conditions)
- Federally insured student loans
- Secured student loans (issued before 1992)
- National direct loans for students
- Student loans for national defense
- Parent PLUS loans for older students
- Loans to support students
Please note that the Parent PLUS cannot be consolidated into the child’s name. You will need to consolidate them with an ICR on your behalf to get credit. You also may not combine Parent PLUS loans with other types of credit.
The other three types of loans that can be combined are subsidized loans, unsubsidized Stafford loans, and Grad PLUS loans. This makes a total of 17 types that can be combined.
If you are in the process of repaying your loans, find out if federal student loan consolidation can help you
If you took out your first loan after 2010, you probably started with the regular Direct Stafford and Direct Grad PLUS loans.
If you consolidated, you have direct consolidation credits. Going direct to direct is not a big change, but it can be helpful because you have less paperwork.
However, if you have another type of credit that is not a direct loan, you could be in serious trouble. While you can certainly read all the material on this page for free, I suggest you contact an expert like us to get a customized plan if you have a five-figure amount of these alternative loan types.
In general, you either want all your federal loans to be consolidated immediately and on their way to loan forgiveness, or you want to refinance them and get cash bonuses.
In any case, Congress has done a disservice to student loan borrowers by creating 18 different types of student loans. Student loan consolidation can sometimes be a good way to address this.
Do you have questions about student loan consolidation? Have you taken any of the above types of credit? Write in the comments below!
Frequently Asked Questions
Who is the best federal student loan consolidation?
The best federal student loan consolidation is the one that offers the lowest interest rate.
What are the 4 types of student loans?
There are four types of student loans: Federal Direct Loans, Federal Perkins Loans, Federal Subsidized and Unsubsidized Stafford Loans, and Private Student Loans.
What are the 3 types of student loans?
There are 3 types of student loans: Federal Direct Loans, Federal Perkins Loans, and Private Student Loans.
