Should I Consolidate My FFEL Loans to Direct Loans?

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Stanley Tate

#1 Student Loan Lawyer

Updated on January 6, 2023

It’s a good idea to consolidate your Federal Family Education Loans, or FFEL Loans, into a Direct Loan if you work in public service or have been making payments on your FFEL Loans for several years and hope to have the remaining balance forgiven.

Consolidation will also let you qualify for the payment pause and interest rate freeze and, thanks to a rule change from the Biden administration and the U.S. Department of Education, give you credit for the payments you made before you applied for consolidation and time spent in certain forbearance or deferment periods. This means that consolidation won’t reset your progress toward forgiveness. Instead, it will increase the number of qualifying payments you’ve made under the different student loan forgiveness programs.

Related: How The Limited PSLF Waiver Works

Another advantage of consolidation is that you’ll be able to access the same income-driven repayment plans and other flexible repayment options currently available to you. In fact, you’ll be able to choose from more IDR plans, which can reduce your monthly payments – particularly if you have Parent PLUS Loans.

All things considered, consolidating FFELP Loans into a Direct Consolidation Loan is a solid option for most student loan borrowers.

Related: FFELP Loans & Student Loan Forgiveness

Can you consolidate a consolidated FFEL loan into a Direct Loan?

Yes, it’s possible to consolidate an FFEL Consolidation Loan into a Direct Loan. This may let you take advantage of Public Service Loan Forgiveness (PSLF) and the IDR Account Adjustment.

The Education Department won’t turn down your application just because you don’t have another loan to consolidate with the FFEL Loan. They’ll let you consolidate so you can move your student debt from the Federal Family Education Loan Program to the Direct Loan Program, where you’ll have access to the most benefits and protections the federal government offers.

Types of loans eligible for consolidation:

  • Direct Loans, including Parent PLUS Loans

  • FFEL Loans, including Subsidized and Unsubsidized Loans

  • Stafford Loans

  • Federal Perkins Loans

Your interest rate may increase

The interest rate on your new Direct Consolidation Loan will be fixed for the life of the loan. The rate you get isn’t tied to your credit score or payment history. Instead, it’s calculated based on the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will provide you with a fixed interest rate that will never change.

Why you shouldn’t consolidate FFEL Loans

In certain situations, consolidating FFEL Program Loans into a Direct Consolidation Loan may not be the best choice. For example, consolidating may not make sense if you owe a significant amount in interest and will likely pay off the loan before you qualify for forgiveness. This is because the government will add the outstanding interest to your balance, resulting in you paying more interest than you would have without consolidation. Essentially, you’ll be paying interest on interest.

I see this scenario arise when my client has a high income, a relatively low student loan balance, and several years remaining before they qualify for any forgiveness plan. In these cases, it might be wiser to stick with the current servicer or refinance the loans with a private lender to secure a lower interest rate — even if it means losing access to benefits unique to federal student loans.

In the past, consolidation was a poor choice for those working towards income-based repayment forgiveness, as the process would erase any progress made. But that’s no longer the case – at least for now. If you submit a Federal Direct Consolidation Loan application by May 1, 2023, the department will give you credit towards income-based repayment forgiveness for payments made since taking out the loans and for time spent in long forbearances and deferments.

Be careful if you qualify for Biden’s debt cancellation plan

If you have both commercially-held FFEL Loans and Direct Loans and qualify for President Biden’s one-time student loan debt cancellation, be careful about consolidating them all together. Consolidating them all together could cause you to lose eligibility for loan cancellation and any potential refunds you’re owed.

Related: How Long Does it Take to Get a PSLF Refund?

The cancellation is only available for existing Direct Loans disbursed by June 30, 2022, and for consolidation loans comprised of any FFEL or Federal Perkins loans if you applied for consolidation before September 29, 2022.

That said, you can still consolidate your privately-held federal loans into a Direct Consolidation Loan while leaving your pre-existing loans alone.

How consolidation affects your credit score

Consolidating your loans could cause your credit score to experience a minor dip. While there isn’t a hard credit check involved in the consolidation process, the government will pay off your existing loans and add a new Direct Consolidation Loan to your credit report. This could decrease the overall age of your accounts, which accounts for about 15% of your score.

Keep in mind that this effect is usually temporary, and your credit score should bounce back over time if you continue to make your payments on time and maintain a healthy credit history.

Related: How Do Student Loans Affect Your Credit Score?

Use the Federal Student Aid website to consolidate

Log in to StudentAid.gov with your FSA ID to submit a consolidation application. You’ll be able to pick the loans you want to be included in the consolidation, choose a student loan servicer, and select a repayment plan. Your repayment term may be up to 30 years, depending on your loan balance and whether you enroll in one of the four types of income-driven repayment plans.

Bottom Line

Consolidating your FFEL Loans into a Direct Loan is a smart move that can bring you closer to loan forgiveness and enhance your repayment options.

With deadlines fast approaching, it’s important to start the process as soon as possible. If you’d like someone to help you understand the information or handle everything for you, schedule a time for us to discuss your options.

 UP NEXT: How to Consolidate Student Loans for PSLF

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