Repaying student loans can be challenging. Often times, particularly for borrowers with multiple loans, repayment turns into a delicate balancing act that must account for multiple student loan payments with different due dates and budgetary limits.
If that sounds familiar, you’re likely searching for a way to simplify repayment, and consolidating student loans may be a solution. A consolidation loan is a single loan that is used to pay off an existing set of loans, resulting in one monthly payment and a single interest rate.
Consolidation loans can be used to simplify both private and federal student loan repayment, but borrowers with federal loans from the Department of Education may want to first consider a Direct Consolidation Loan.
This is a loan program that can be used to consolidate multiple federal student loans to secure a single fixed interest rate and monthly payment as well as an easier repayment strategy.
On this page:
- What is a Direct Consolidation Loan?
- Federal Loan Consolidation Requirements
- Is a Federal Direct Consolidation Loan Worth It?
- Applying for a Direct Consolidation Loan
- Difference Between Private & Federal Student Loan Consolidation
What is a Direct Consolidation Loan?
Unlike private loans for students, which can be consolidated through a plethora of private lenders, federal borrowers who want to maintain the benefits offered by the federal government must consolidate loans through the Direct Consolidation Loan.
This loan option is available to most borrowers, including those who currently have PLUS loans, Federal Perkins Loans, and Health Education Assistance Loans. If you’re thinking about consolidating your federal loans, here are a few things to keep in mind.
- New Fixed Rate: When consolidating loans through the Direct Consolidation Loan, the new fixed rate will be based on the “weighted average of the existing loan rates…rounded up to the nearest one-eighth of one percent.”
- Simplified Loan Repayment: Once federal loans are consolidated, repayment will consist of a single monthly payment made to a single loan servicer—assuming all federal loans are consolidated.
- Lower Payments: The Direct Consolidation Loan allows borrowers access to a lower payment by extending the repayment terms to a maximum of 30 years. However, borrowers should keep in mind that extended repayment terms and lower payments often result in more interest and therefore a more expensive loan.
- Additional Loan Repayment Plans: The federal government has created numerous repayment plans, many of which are income-driven. This includes the Income-Based Repayment Plan (IBR), Revised Pay As You Earn Plan (REPAYE), and the Income Contingent Repayment Plan (ICR). Many of these plans decrease the burden of repayment by basing monthly payments on a percentage of the borrower’s discretionary income (10% to 20%, based on the plan). Additionally, these plans also typically offer loan forgiveness after 20 to 25 years of eligible payments.
- Public Service Loan Forgiveness (PSLF): Some borrowers may find that loan consolidation results in access to the Public Service Loan Forgiveness plan. Under this plan, full-time government and not-for-profit employees may be eligible for loan forgiveness after 120 qualifying monthly payments.
Federal Loan Consolidation Requirements
Most federal loans are eligible for consolidation as long as they are in repayment or in a grace period; however, the consolidation must include at least one Direct Loan or FFEL Program loan.
Further, eligibility is restricted—though not necessarily impossible—for borrowers who have already consolidated a loan (including FFEL Consolidation Loans) as well as those who have loans in default.
Borrowers who want to consolidate a defaulted loan must agree to a qualifying repayment plan (IBR, REPAYE, PAYE, or ICR) or make three consecutive monthly payments.
Is a Federal Direct Consolidation Loan Worth It?
Federal student loan consolidation often results in a lower monthly payment and a single fixed interest rate, which may be particularly attractive to borrowers who currently have variable rates.
However, one of the most enticing aspects of federal loan consolidation is increased access to many of the income-based repayment and/or loan forgiveness programs.
Though the pros of loan consolidation are often enough to make it a good decision for some borrowers, there are several cons that should be carefully considered before making a decision.
Since repayment is typically extended and the new rate is a weighted average of all loans included in the consolidation, borrowers may find that they will make more payments and pay more in interest.
Additionally, consolidation through the Direct Consolidation Loan may result in the loss of existing borrower benefits and repayment options, including principal rebates, interest rate discounts, and loan forgiveness benefits associated with the existing loans.
This is particularly true for borrowers who have already enrolled in income-driven repayment plans or a forgiveness plan, as consolidation will “reset the clock,” essentially extending repayment.
Applying for a Direct Consolidation Loan
To apply for a Direct Consolidation Loan, borrowers should visit StudentLoans.gov, where they can complete and submit the online application. Borrowers can also print, complete, and mail the application, if they prefer.
To complete the form, borrowers must be able to provide the following:
- Basic borrower information (name, address, SSN, etc.)
- Two references (adults who do not live with the applicant and have known them for three years or more)
- The loans to be included in the consolidation (including the name of servicer or loan holder, account number, and estimated payoff amount). Note that this information can be found on the National Student Loan Data System (NSLDS).
- Loans that are not included in the consolidation but should be considered when determining repayment.
- The end date of loans in grace periods if there is a desire to delay the consolidation until the grace period ends.
For some borrowers, the Direct Consolidation Loan can make repayment easier, particularly through a single monthly payment and access to income-driven repayment programs; however, federal student loan consolidation may not be right for everyone.
If you have questions about the Direct Consolidation Loan, visit the Federal Student Aid website managed by the U.S. Department of Education or contact the Student Loan Support Center at 1.800.557.7394.
Difference Between Private & Federal Student Loan Consolidation
Despite the fact that both private student loans and federal education loans can be consolidated—in some cases together—there are significant differences that borrowers must be aware of.
As the name would suggest, private student loan consolidation is a loan consolidation product offered by a private lender. This means that eligibility requirements, rates, loan terms, and so on will vary from lender to lender.
Eligibility, rates, and terms often depend on the borrower’s credit score and the total loan amount, so those considering a private consolidation loan should shop around and contact individual lenders for lender-specific information.
It’s important to note that most lenders will allow borrowers to consolidate both private and federal student loans into one new loan, though that’s not always advisable.
Federal loan consolidation, on the other hand, is only for federal loans. Eligibility, rates, and terms are uniformly set by the government, regardless of what company is servicing the loans (e.g., Navient, EAS, EdFinancial, etc.).
While private loan consolidation rates vary based on the lender and the applicant’s credit history, federal consolidation loan rates are based on the average rate of all loans included in the consolidation.