What is a direct consolidation loan?
A direct consolidation loan is a type of federal loan that combines two or more federal education loans into a single loan with a fixed interest rate based on the average rate of the loans being consolidated.
- A direct consolidation loan is a type of federal loan that combines two or more federal education loans into a single loan with a fixed interest rate based on the average rate of the loans being consolidated.
- Direct consolidation loans allow borrowers to reduce the number of loan payments they have to make each month by combining them into one payment.
- Most federal loans are eligible for consolidation, but private loans are not eligible.
- Borrowers can consolidate once they complete school, drop out of school, or fall below part-time student status.
- Loan consolidation can also give someone access to additional loan repayment plans and forgiveness programs.
Understanding a Direct Consolidation Loan
Direct consolidation loans allow borrowers to reduce the number of loan payments they have to make each month by combining them into one payment. These loans are facilitated by the US Department of Education and do not require borrowers to pay an application fee. Most federal loans are eligible for consolidation, but private loans are not eligible. Borrowers can consolidate once they complete school, drop out of school, or fall below part-time student status.
Once you roll over your original loans to a direct consolidation loan, you typically lose the benefits of those original loans, so you need to consider this carefully before signing on the dotted line.
Loan consolidation can also give someone access to additional loan repayment plans and loan forgiveness programs. Loan forgiveness programs allow a borrower to cancel his obligation to repay all or a portion of the remaining principal and interest owed on a student loan. The most common of these programs are the Direct Loan Program and FEEL Teacher Loan Forgiveness Program and the Direct Loan Program Public Service Loan Forgiveness Program.
With loan forgiveness, borrowers are not required to pay income taxes on loan amounts that are canceled or forgiven based on qualifying employment.
Direct Consolidation Loan Process
Direct consolidation loans are made through the Federal Direct Student Loan Program. The Federal Direct Student Loan Program allows students, as well as parents, to borrow directly from the US Department of Education at participating schools.
Before obtaining a direct consolidation loan, it is important to consider any benefits associated with original loans, such as interest rate discounts and repayments. Once the loans are transferred to a new direct consolidated loan, borrowers often lose those benefits. Also, if the new loan increases the repayment period, the borrower may end up paying more interest.
Federal student loan payments are withheld and no interest is charged until September 30, 2021.
Federal student loan consolidation is free and the process is fairly simple. Private companies may contact borrowers to offer assistance with this process for a fee, but they are not affiliated with the Department of Education or its federal loan servicers.
After completing an application, the borrower confirms the loans they are seeking to consolidate and then agrees to repay the new direct consolidation loan. Once this process is complete, the borrower will have a single monthly payment on the new loan, rather than multiple monthly payments on multiple loans.
Advantages and disadvantages of a direct consolidation loan
The advantages of a direct consolidation loan are fairly straightforward. You may be eligible for lower monthly payments because the repayment term extends up to 30 years. You can also get a lower interest rate because direct consolidation loans have a fixed interest rate. As of July 1, 2006, all federal student loans have a fixed interest rate. However, if any of your loans were disbursed before this date, you may have a variable interest rate. Also, you only have to make one payment per month. This can make it easier to keep track of your student loan balance.
Borrowers can also have access to different payment options. These types of payment plans are available for direct consolidation loans:
- A standard payment plan
- A gradual payment plan
- An extended payment plan
- The Income Contingent Repayment Plan (ICR)
- The Pay As You Earn (PAYE) payment plan
- The revised Pay As You Earn (REPAYE) payment plan
- An income-based payment plan (IBR)
Loans come out of default status once they are consolidated. If you are in default on one (or all) of the loans you want to consolidate, this may be a good option for you, but you will need to meet certain requirements. (You must first make three consecutive monthly payments on the delinquent loan or agree to repay your new direct consolidation loan through one of the different payment plan options.)
You don’t need to wrap everything in the consolidation loan. Applicants using the studentloans.gov The site may deselect the loans that they do not wish to include in the application. (The website form will automatically import all federal loans in the applicant’s name.)
Borrowers can also access loan forgiveness options, including the Public Service Loan Forgiveness (PSLF) program.
However, borrowers should be aware that their interest rate may also increase; Because consolidation extends the repayment period, perhaps to 30 years, your monthly payment goes down, but this also causes you to pay more interest over the life of your loan.
You don’t get a grace period with a direct consolidation loan; the repayment period begins immediately after consolidation and the first payment will be due in about 60 days. Also, if your loans were past due, you won’t get an automatic credit boost if you consolidate your loans.
Previous loan payments prior to consolidation will not count toward loan forgiveness requirements. And finally, there are some benefits you can lose by consolidating your loans. These include reduced interest rates, principal repayments, repayment incentive programs, or loan cancellation benefits that are available under the loans you are consolidating.
Pay more interest over the life of the loan
You don’t have a grace period
Previous loan payments do not count toward loan forgiveness requirements
You may lose some benefits when consolidating your loans
Is Direct Loan Consolidation The Right Choice?
There are several different reasons why you can choose direct loan consolidation. If keeping track of all your student loan payments is difficult, consolidating all of your federal loans into one monthly payment may be beneficial to you.
Not all federal loans are eligible for income-based repayment plans. By opting for direct loan consolidation, you will be able to access payment plans based on income. You can also opt for direct loan consolidation if you want to be eligible for certain loan forgiveness programs. With an income-based payment plan, you may qualify for forgiveness of the remaining balance at the end of the payment term.
Also, direct loan consolidation may be the right option if you want a fixed interest rate. If you have federal loans that were disbursed before July 1, 2006, one or more of your loans may have a variable interest rate. (Direct consolidation loans have only fixed rates.)
Direct Consolidation Loans FAQs
What is the interest rate on a direct consolidation loan?
When you consolidate your loans, you will have a fixed interest rate for the life of the loan. The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded to the nearest eighth of one percent. If the weighted average interest on the loans is 5.25%, for example, the new interest rate will be 5.375% after consolidation.
How can I undo a Direct Loan Program consolidation loan?
If you are interested in canceling your direct consolidation loan application, you should contact your loan servicer for more information. However, there is no way to reverse or undo a student loan consolidation.
What is a Direct Subsidized Consolidation Loan?
Direct Loan Consolidation allows students to consolidate their loans to expedite payments. Borrowers can consolidate subsidized and unsubsidized Stafford loans, supplemental student loans, federally insured student loans, PLUS loans, direct loans, Perkins loans, and any other type of federal student loan.
How long does a direct consolidation loan take to pay off old loans?
The terms of a consolidated loan range from seven to 30 years, depending on the balance and the payment schedule.