New Grad Student Loan Questions and Answers: Consolidation
“To consolidate vs not consolidate?”
“What are the benefits of ending the post-graduation grace period?”
There are four primary benefits to waiving your federal student loan grace period:
- Setting your principal balance to the lowest level possible. Interest continues to accumulate during your grace period. Using a Federal Direct Consolidation loan to end your grace period and enter repayment forces your unpaid interest to capitalize early. Your principal balance will be lower and you will accumulate less interest over the course of repayment.
- Getting your repayment plan started sooner means reaching the end of student loan repayment faster. Most veterinary graduates will start with student loan balances that exceed their incomes, a situation that highly favors using income-driven repayment. The sooner you get started in income-driven repayment, the sooner you’ll reach forgiveness. The sooner you reach forgiveness (or end repayment), the less you’ll pay. Your grace period does not count towards the time needed to reach forgiveness. Get the forgiveness clock started as soon as possible using a Federal Direct Consolidation loan, ending the remainder of your grace period, and applying for an income-driven repayment plan.
- You can have a $0/mo payment due for the first twelve months of repayment. If you start your Federal Direct Consolidation loan, end the remainder of your grace period, and choose an income-driven repayment plan BEFORE you start your first job/internship, you can use your previous year’s tax return or indicate that you have zero taxable income to secure a $0/mo payment for the first twelve months of income-driven repayment. If you are going to reach forgiveness under income-driven repayment, having a $0/mo payment will not only decrease your total repayment costs but allow you to get a head start on your financial wellness plan.
- Consolidation allows you to choose your loan servicer. Unfortunately, all of the loan servicers are terrible at administering the income-driven repayment plans. Use this unique opportunity to choose FedLoan Servicing (PHEAA) as your loan servicer. Not because they are good, but because they are the official monitor of Public Service Loan Forgiveness (PSLF) progress. Since PSLF requires you to use income-driven repayment to satisfy the requirements, FedLoan Servicing generally has more experience with income-driven repayment plans. Also, if you end up working towards PSLF, your loans will get moved to FedLoan Servicing. Move them during the consolidation process as you’re getting started in repayment to help minimize mistakes that often happen with loan servicer transitions during repayment.
“How do we know if our student loans are able to be consolidated?”
Your Direct Loans, Health Professions Student Loans, Perkins Loans, Loans for Disadvantaged Student, or FFEL program loans need only be in their grace period, deferment, or repayment in order to include them in a Federal Direct Consolidation Loan.
Your Direct Unsubsidized veterinary school loans should enter their grace period shortly after your last semester ends or after graduation. I wish I knew the rhyme or reason for each school’s timing on the loan status switch, but it’s highly variable. Some schools switch over quickly and some even a few days before graduation. Others can take a few weeks or even a month to reflect your graduation status.
The loans that usually hold up your Direct Consolidation loan are Direct Unsubsidized Loans and Health Professions Student Loans. Once these loans enter their grace period, you can include them in your post-graduation Direct Consolidation loan.
Your student aid data file is usually updated at least monthly, so you might see your status update with the change of the month following your graduation. You might even call your school financial aid office after graduation to see when they might report your graduation status to the Department of Education. Sometimes that request can nudge your school into updating your status or reporting your status change earlier.
*Special Note: If you have previously consolidated older federal student loans, you can consolidate those with your new consolidation as long as you include another Direct loan in the consolidation. That is usually pretty easy since most veterinary students finance their education with Direct Unsubsidized and Direct Grad PLUS loans.
“Can you consolidate after the grace period?”
Yes. But, the timing of your Federal Direct Consolidation is important.
Your Direct Loans and/or Federal Family Education Loans (FFEL) need only be in their grace period, deferment, or repayment in order to include them in a Federal Direct Consolidation Loan.
There are a couple of issues with waiting until your veterinary school loan grace period expires to start the Direct Consolidation Loan:
1. You continue to accrue interest on all of your unsubsidized loans during the grace period. Thus, when you do enter repayment or consolidate later, the increased unpaid interest balance will be added to your principal resulting in a higher starting repayment balance. You are charged interest on your principal — the higher your principal, the more you’ll pay during repayment.
2. The Direct Consolidation Loan takes 30-60 days to process. Once processed your first payment will be due 30 days after that. If you wait until after your grace period, there is nearly 9 months of time that you are not in repayment, thus not making qualifying payments towards forgiveness. Better to get the clock ticking, especially if you anticipate having a balance forgiven under an income-driven repayment plan.
“Can you consolidate and waive your grace period if you’re planning to do Public Service Loan Forgiveness (PSLF)?”
You can and you should, especially if you’re starting a PSLF qualifying employment soon after graduation.
In order to make qualifying PSLF payments, you have to be 1) in repayment using an income-driven repayment plan, 2) paying federal Direct Loans on-time, and 3) employed full-time (average of 30 hours per week) with a qualifying employer.
The sooner you can get most or all of your federal student loans consolidated into a Direct Consolidation Loan, the sooner you can officially start making payments using an income-driven repayment plan, which are 2 of the 3 primary requirements for working towards PSLF. And if you can get the $0/mo payment due for the first 12 months of repayment, you’ll have more of your loans forgiven when you reach PSLF.
Per the PSLF Employment Certification Form, “A qualifying employer includes the government, a not-for-profit organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code, or a private not-for-profit organization that provides certain public services. Serving in an AmeriCorps or Peace Corps position is also qualifying employment.”
I would recommend bringing a PSLF Employment Certification Form to your employer after you’ve started working with them and made a few monthly payments towards your student loans. Repeat that process each year so you have 9 or 10 of those certification forms to submit with your actual application for PSLF.
After you’ve made 120 of those qualifying PSLF payments, you should have an easier time (in theory) having your remaining student loan balance forgiven tax-free if you have all of your employment certification forms documenting your progress along the way.
“My Perkins Loans, Health Professions Student Loan, and Loans for Disadvantaged Students aren’t listed as eligible under income-driven repayment. Can I consolidate them in order to pay them using PAYE, REPAYE, or IBR?”
Yes, you can consolidate those non-Direct loan types as long as they are in their grace period or in repayment. Including non-Direct federal student loans in your Direct Consolidation loan is one of the primary reasons to utilize a federal Direct Consolidation Loan. Incorporating your non-Direct federal student loans into your Direct Consolidation loan makes them eligible for income-driven repayment (IDR) and reduces the total amount you’ll pay towards your loans each month.
The most beneficial income-driven repayment plans (PAYE, REPAYE, IBR) and Public Service Loan Forgiveness (PSLF) can only be used with Federal Direct Loans. The only way to make federal non-Direct Loan types qualify for IDR and PSLF is through a Direct Consolidation Loan and the best time to consolidate your loans is as soon as you can after you graduate veterinary school.
“Can you do Federal Direct Consolidation once you have started payments on an income-driven repayment plan?”
You can. However, if you are already in repayment, you should be extremely careful using a Direct Consolidation Loan. This is why the timing of your Federal Direct Consolidation Loan is so important.
When you consolidate, you receive a new loan(s) that pays off all of the loans included in the consolidation. If you have made qualifying income-driven payments or PSLF payments to loans that you consolidate, you will lose credit for those qualifying payments. Essentially, you reset your forgiveness clock on any loan you consolidate. That is another reason to start the Direct Consolidation Loan process as early as possible, ideally right after you graduate veterinary school.
“Should I consolidate my spouse’s federal student loans with mine?”
You can no longer combine federal student loans with your spouse as part of a federal consolidation loan. That is likely a good thing because it is a mess to deal with in the event of separation/divorce.
You could probably still do a consolidation with your spouse using a private loan, but for many other reasons in addition to the fact it would still be a mess in the event of separation/divorce, I would highly discourage consolidating your student loans with your spouse’s student loans.