Should You Consolidate Student Loans for PSLF?

If you’re struggling to keep track of all of your debt, deciding to consolidate federal student loans can simplify your payments and, in some cases, make you eligible for Public Service Loan Forgiveness (PSLF).

But before you decide to consolidate loans for PSLF, make sure you understand all the potential drawbacks before submitting your application. PSLF consolidation could reset your progress toward relief, particularly if you do it after the current government-issued PSLF waiver program expires on Nov. 1, 2022.

Here are some question to answer before considering direct student loan consolidation:

How does Public Service Loan Forgiveness work?

If you have federal student loans and work in public service, you may be eligible for PSLF. Under this program, borrowers who work for an eligible nonprofit organization or government agency can have their loans forgiven after making 120 qualifying payments, or 12 monthly payments for 10 years.

Only federal loans, not private loans, qualify for PSLF. To be eligible for loan forgiveness, you must work full-time. Make sure the work you’re doing qualifies you by filling out the Public Service Loan Forgiveness certification form. You must also have federal direct loans and make payments toward them under an income-driven repayment (IDR) plan.

Depending on your salary and your loan balance, PSLF can save you a significant amount. To find out how much you could receive in forgiveness, check out the PSLF calculator.

Do you have to consolidate loans for PSLF?

PSLF consolidation is only a requirement if it makes your federal loans eligible for an income-driven repayment plan. This has been the case for federal family education loans and Perkins loans.

So while you might not have to consolidate loans for PSLF, it could still be beneficial.

A federal direct consolidation loan combines your federal student loans into one. You’ll have just one interest rate (set at the weighted average of your previous loans’ rates, rounded up), with one loan servicer and one monthly payment. After all, managing several different loans and due dates can be stressful.

Why PSLF consolidation could be a bad idea

Consolidating your loans into one can sound appealing — but, if you’ve already made qualifying payments toward PSLF prior to consolidation, opting to consolidate your loans will cause you to lose credit for those payments.

For example, if you’ve made five years of payments before consolidating your federal student loans, those payments won’t count after consolidation. You can still pursue PSLF, but the clock starts over when you consolidate your debt. Instead of being halfway towards loan forgiveness, you’ll have to make another 10 years of payments to qualify. In this scenario, it’s likely better to avoid consolidating and retain your progress toward relief.

Should you go through with PSLF consolidation?

Consolidating your loans can be a smart option, even if you’re pursuing PSLF. Consider it in the following situations:

• You’re still in your grace period or early on in repayment. If you haven’t made payments yet or have just started, you can consolidate your loans without losing too many qualifying payments for PSLF. You can simplify your debt while still making progress toward loan forgiveness.
• You want access to IDR plans. Some federal loans are ineligible for IDR plans. To get around this rule, you can group your loans into a direct consolidation loan and then apply for an IDR plan. This could reduce your monthly bill, and it’ll leave you with just one payment to manage. Do so immediately after leaving school (or your grace period) to make sure you start on the path to forgiveness as early as possible.
• You need a lower monthly payment. When you take out a direct consolidation loan, you can choose a new repayment period. You can opt for a loan with a term as long as 30 years, which can dramatically reduce your payments and make your loans more manageable. But if a lower payment is your priority, choosing an income-driven plan might make more sense, since you’ll be eligible for forgiveness on the remaining balance after 20 or 25 years.

Other potential reasons to consolidate could include ditching a variable rate on an older federal student loan or rehabilitating loans out of default.

When is Public Service Loan Forgiveness not worth it?

Along with considering the pros and cons of loan consolidation, it’s also worth weighing whether PSLF is right for you. The program requires working for 10 years in public service before loans can be forgiven.

A lot can change in 10 years, making PSLF a big commitment for those who are still uncertain of their career path. If you leave your public service career while working towards PSLF, you won’t be eligible for forgiveness.

Since you’ll need to be on an income-driven repayment plan to qualify, your payments will be reduced and your loans will accrue more interest than on other plans. If you leave the PSLF program but stay on income-driven repayment, you’ll still get forgiveness on the balance left over — but unlike under PSLF, that amount will be taxed (know that student loan forgiveness is tax-free only through 2025).

It’s also worth noting that the PSLF program is still relatively new. The program was implemented in 2007, so the first borrowers to receive PSLF became eligible in 2017. It came under scrutiny, as low percentages of borrowers were approved until the coronavirus-era PSLF waiver arrived in October 2021.

What about alternatives to PSLF consolidation?

Another option to consider is student loan refinancing. With this strategy, you consolidate some or all of your loans — federal, private or both — into a new one through a private lender. The new loan will have a different repayment term, interest rate and monthly payment. You need good or excellent credit and solid income to qualify.

Once you refinance federal loans, however, you’re no longer eligible for PSLF or IDR plans. Still, refinancing can be an option for saving money on high-interest private loans, if you don’t plan to use federal loan benefits or you want to pay off your debt ahead of schedule.

If you qualify, refinancing could result in a lower interest rate, while federal student loan consolidation is more useful for qualifying for certain repayment programs or reducing your bill by extending your repayment term. Consider other pros and cons of refinancing before you proceed.