Consider consolidating student loans with a private lender

President Biden’s student loan forgiveness program was welcome news for millions of Americans saddled with this debt. But there is already a lot of misinformation circulating about how to use the program. And a Google search won’t necessarily lead you to the right answer.

Your loans must be held by the US Department of Education to be eligible for most types of loan relief. Loans held by private banks or financial institutions don’t qualify for debt relief — and this is true even if you had federal loans and consolidated them with a private lender.

But a Google search for “direct loan consolidation” and “student loan consolidation” on Tuesday first filled with ads from private companies, including SoFi and Credible, like senior director of policy and advocacy Bryce McKibben at The Hope Center, which researches student loans, first reported on Twitter. That Federal Student Aid website is the fourth or fifth result.

This can be confusing for borrowers who don’t know any better. If they were to consolidate with a private lender now, they would lose their forgiving eligibility.

As of Wednesday, after McKibben tweeted about the results, the Federal Student Aid website became the top Google search result for “direct loan consolidation.” However, other related search terms fill non-governmental sites first.

Here’s what borrowers need to know about consolidating their loans so they don’t miss out on government forgiveness programs.

Consolidated loans can still be made — if they’re federal loans

There are many reasons someone might consolidate their student loansincluding bundling all your loans under one service provider so that your monthly payments are consolidated into a single bill.

And some of the Department of Education’s forgiveness programs require borrowers to consolidate their loans in order to be eligible. An example is the Notice of Limited Public Loan Forgiveness (PSLF).

That The waiver allows officials on the PSLF track to receive a credit for partial payments already made, late payments, or payments made under the wrong repayment schedule. To use it, applicants must first consolidate all their loans into one direct loan.

Borrowers must do the same Entitlement to income-related repayment (IDR) Plans. These plans can lower a borrower’s monthly payment and be waived after 20 to 25 years.

Additionally, borrowers with loans made under the Federal Family Education Loan (FFEL) program may be eligible for forgiveness if they do so consolidate into a direct loan. Also, the consolidation of commercial FFEL and Perkins loans into one direct loan makes them eligible for the current pause in federal student loan payments and accrual, McKibben said wealth in an email.

But again, that’s only true if the loans are held by the Department of Education (and serviced by one of the companies it contracts with) — not a private lender.

“We know for certain that borrowers consolidating loans that were disbursed on or before June 30, 2022 may be eligible for forgiveness,” says McKibben. That means many commercial FFEL loans and all Federal Perkins loans are eligible for cancellation.

However, McKibben said the government is still negotiating with the commercial FFEL industry to see if there is a way for borrowers to receive forgiveness without the need for consolidation.

“We don’t know what timeline they’re on, and some borrowers may want to consolidate now to take advantage of the pause in payments and interest rates,” he says.

The government will not charge you for consolidating loans

The Department of Education does not charge borrowers for consolidation. Private companies can come forward and offer to consolidate your loans at a price, but they did no affiliation with the government.

Private lenders may be able to offer a lower interest rate, although this is unlikely and depends on your credit history. But consolidate your Converting a federal loan into a personal loan involves risks– including that you would lose the ability to have your debt forgiven.

Another thing to consider when consolidating, McKibben says, is whether you have a lot of unpaid interest.

“When a borrower consolidates, its interest is capitalized into the principal balance,” he says. “If a borrower does not have a lot of interest accrued, or if the new balance after capitalization would be less than or very close to the $10,000/$20,000 offered by cancellation, consolidation makes financial sense.”

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