Smart Move or Costly Mistake?

Millions of federal student loan borrowers are struggling to navigate a seemingly ever-changing landscape of federal student loan programs.Between legal challenges, regulatory updates and new legislation that will reshape repayment and loan forgiveness in the coming months and years, figuring out the best course of action can seem like an impossible task.And ever-present throughout these considerations is whether borrowers should consolidate their federal student loans.Federal Direct loan consolidation offers borrowers the opportunity to take out a new federal student loan via the Department of Education.

The new consolidation loan would pay off the underlying federal loans and would have a weighted average interest rate based on the rates of the loans included in the consolidation.Benefits of federal Direct loan consolidation include simplified repayment and loan management; consolidation can also be necessary to access new options for repayment and student loan forgiveness, depending on the specific circumstances.But Direct loan consolidation can also be a huge mistake, leaving borrowers in a worse position than they would have been if they hadn’t consolidated.Here's what student loan borrowers need to know about Direct loan consolidation in the context of the current landscape.

Direct consolidation may be necessary for borrowers pursuing student loan forgiveness, but not always Certain federal student loan forgiveness and repayment programs are limited to Direct loans only.That means that other types of federal student loans, such as older loans issued through the Family Federal Education Loan (FFEL) program, won’t qualify for those programs unless those loans are consolidated into a Direct loan.The clearest example of this is the Public Service Loan Forgiveness (PSLF) program.PSLF allows borrowers to become eligible for student loan forgiveness after making 120 qualifying monthly payments while working in eligible full-time nonprofit or government employment.  Qualifying payments must be made on a Direct federal student loan.

So, borrowers who have non-Direct federal student loans may need to consolidate those loans to become eligible for PSLF.Borrowers who already have Direct loans do not need to consolidate to access the PSLF program, as all Direct loans are eligible for the program.And in fact, consolidating can have some serious downsides.Here are some general rules of thumb: Borrowers with non-Direct federal student loans (like FFEL loans) who want to access the student loan forgiveness benefits associated with PSLF would need to consolidate those loans via the Direct loan program.

Consolidation would potentially erase any existing credit the borrower already has towards 20- or 25-year loan forgiveness under Income-Based Repayment (IBR), however, so it is important to evaluate whether consolidating to pursue PSLF is worth the loss of that IBR credit.Borrowers with only Direct federal student loans should not need to consolidate those loans to qualify for PSLF.If a borrower consolidates anyway, even though they don’t need to, new regulations that went into effect in 2023 should prevent the loss of existing PSLF credit.The new Direct consolidation loan would be credited with the weighted average of the PSLF credit associated with each underlying loan included in the consolidation.

This doesn’t necessarily put borrowers in a better position than if they had not consolidated; it just means they won’t lose all their student loan forgiveness credit.But, as with FFEL borrowers, consolidating loans that have income-driven repayment (IDR) credit toward loan forgiveness on a 20- or 25-year term could result in the loss of that credit.And that may not be worth it, particularly given that for most Direct loan borrowers, there’s no need to consolidate to access PSLF.Direct loan consolidation may be necessary for FFEL loan borrowers to pursue certain IDR plans such as Pay As You Earn (PAYE), Income-Contingent Repayment (ICR) and the new Repayment Assistance Plan (RAP) expected to launch in 2026.

But consolidation is not necessary for any Direct or FFEL loan borrower to access Income-Based Repayment (IBR), which is the only existing IDR plan that will be preserved under recent legislation.And, as noted, consolidating loans with existing IDR credit can result in the loss of that credit, which can make consolidation quite risky at the moment.Consolidating student loans after June 2026 could be problematic Under the “One, Big, Beautiful Bill Act” that President Trump signed in July, borrowers currently in repayment on their federal student loans will lose access to three current IDR plans by July 1, 2028: ICR, PAYE and SAVE.But the IBR plan is preserved under the legislation, as are the Extended and Graduated repayment plans for borrowers not currently repaying their loans based on income.

These borrowers will also be able to opt into RAP if they want, once that plan is launched next year.However, consolidating federal student loans on or after July 1, 2026, can dramatically change a borrower’s repayment options.Doing so would result in the borrower losing access to IBR, as well as the Extended and Graduated repayment plans.“Borrowers that take on any new loan — including borrowers that consolidate an existing federal loan—on or after July 1, 2026 will only be eligible for two repayment plans: the standard repayment plan or the RAP plan,” said the National Consumer Law Center in a blog post earlier this summer analyzing the One, Big, Beautiful Bill Act.  While RAP can result in lower monthly payments for some borrowers as compared to IBR, the plan will not allow for student loan forgiveness until after 30 years in repayment, instead of the 20- or 25-year repayment terms available under IBR.

That can result in borrowers paying much more in total under RAP than they would under IBR, even if their monthly payments are lower.So, consolidating federal student loans after June 2026 could be a costly mistake.Parent PLUS consolidation may be necessary to access affordable student loan payments For Parent PLUS borrowers, the question about whether to consolidate their student loans or not is particularly complicated.But so much is at stake for these borrowers, and if they don’t do the right thing, there could be massive financial repercussions.

The general rule for Parent PLUS loans, which are a type of student loan issued to the parent of an undergraduate student, is that they do not qualify for IDR plans.The historic exception to that rule is that borrowers who consolidate their Parent PLUS loans via the Direct consolidation program can enroll in Income-Contingent Repayment (ICR).The ICR plan is generally the most expensive IDR option, but it still can provide affordable payments (particularly for lower-income borrowers) and a pathway to student loan forgiveness, either on ICR’s 25-year repayment term or via PSLF.But ICR is getting phased out by 2028 under the One, Big Beautiful Bill Act.

And Parent PLUS borrowers may need to take very specific action to be able to maintain eligibility for income-driven repayment.Under the provisions of the One, Big Beautiful Bill Act, Parent PLUS borrowers who have already consolidated their loans and are now enrolled in ICR or another IDR plan can be grandfathered into the IBR plan, as long as they apply to enroll in IBR before July 1, 2028.  Parent PLUS borrowers who have not yet consolidated their loans would need to complete their consolidation by July 1, 2026, and they would need to enroll in ICR before July 1, 2028, to become eligible to switch to IBR.“The Big Bill significantly changes Parent PLUS borrowers’ repayment options,” said the National Consumer Law Center in its blog post.“Only Parent PLUS borrowers that consolidate their loans before July 1, 2026 and are enrolled in any IDR plan between now and July 1, 2028 will be eligible for an income-driven repayment plan after the SAVE, ICR, and PAYE plans are eliminated on or before July 1, 2028.

Those borrowers will be eligible for the Income-Based Repayment (IBR) plan.They will not be eligible for RAP.Existing Parent PLUS borrowers who do not jump through these hoops in time will be locked out of income-driven repayment options, which could make it very difficult to manage their loans if they cannot afford fixed payments.” The Department of Education added in online guidance, “Borrowers who must consolidate in order to access the IBR, ICR, and PAYE Plans must have their consolidation loan disbursed no later than June 30, 2026, in order to access IBR, ICR, and PAYE.Borrowers who must consolidate their Parent PLUS loans in order to access IBR and ICR don’t need to be enrolled in ICR before June 30, 2026, in order to eventually access IBR.” Importantly, Parent PLUS borrowers who take out any new student loan (or consolidate existing loans) on or after July 1, 2026 will only be eligible for the Standard plan.

This would effectively lock them out of any repayment plan based on income, as well as PSLF.“Borrowers who receive disbursements on new loans or on a new consolidation loan on or after July 1, 2026, won’t have access to IBR, ICR, or PAYE even if they were previously enrolled in any of those plans,” said the department in its online guidance.“We strongly encourage borrowers who must consolidate their loans in order to access the IBR, ICR, and PAYE Plans to apply for their consolidation loan at least three months before July 1, 2026, to ensure that their consolidation loan is disbursed before July 1, 2026.”