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.

BREAKING DOWN 'Direct Consolidation Loan'

Direct consolidation loans allow the borrower to make a single monthly payment. These loans are facilitated by the U.S. Department of Education and do not require borrowers to pay an application fee. These types of loans allow borrowers to lower the number of loan payments they have to make each month, combining them into a single payment. Most federal loans are eligible for consolidation, but private loans are not eligible. Borrowers can consolidate once they complete school, leave school or fall below half-time student status. Loan consolidation can also give someone access to additional loan repayment plans and forgiveness programs.

Loan forgiveness refers to the cancellation of a borrower's obligation to repay all or a portion of the remaining principal and interest owed on a student loan. The term loan forgiveness is usually in reference to the Direct Loan and FEEL Teacher Loan Forgiveness Program or the Direct Loan Public Service Loan Forgiveness Program. With loan forgiveness, borrowers are not required to pay income tax on loan amounts that are canceled or forgiven based on qualifying employment.

How the Process Works

Direct consolidation loans are made through the Federal Direct Student Loan Program and allow students, as well as parents, to borrow directly from the U.S. Department of Education at participating schools.

Before considering a direct consolidation loan, it is important to consider any benefits associated with the original loans, such as interest rate discounts and rebates. Once the loans get rolled into a new direct consolidated loan, borrowers typically lose those benefits. Additionally, if the new loan increases the repayment period, the borrower may wind up paying more interest.

Consolidation of federal education loans is free and the process is fairly simple. Private companies may reach out to borrowers to offer to help with this process for a fee, but they are not affiliated the U.S. Department of Education (ED) or ED's 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 then have a single monthly payment on the new loan instead of multiple monthly payments on several loans.

RELATED TERMS
  1. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans — ...
  2. Origination

    Origination is the process of creating a home loan or mortgage.
  3. Standing Loan

    Standing loan refers to an interest-only loan where repayment ...
  4. Unsecured Loan

    An unsecured loan is a loan that is issued and supported only ...
  5. Federal Direct Loan Program

    The Federal Direct Loan Program provides low-interest loans to ...
  6. Loan Register

    A loan register lists when the loans are due, recorded in chronological ...
Related Articles
  1. Personal Finance

    Time To Consolidate Your Student Loans?

    Use these strategies to decide whether consolidating your student loans makes sense for you – and what to do next if it does.
  2. Taxes

    Debt Consolidation: When It Helps, When It Doesn't

    Here's the smart way to use a debt consolidation to get your financial life back on track
  3. Personal Finance

    Top Student Loan Providers

    Many banks and institutions offer student loans, but some offer better deals than others. Read this list of top student loan providers before you borrow.
  4. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  5. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  6. Personal Finance

    10 Tips to Topple Student Loan Debt

    How to manage those burdensome payments as you embark on adult life.
  7. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  8. Financial Advisor

    Deal with Your College Debt Using These Steps

    The worst thing to do with college debt is to ignore it. The best way to start tackling it is with a clear roadmap to financial freedom.
  9. Personal Finance

    Federal Direct Loans: Subsidized vs. Unsubsidized

    The Federal Direct Loan Program is designed to help make paying for college more affordable.
RELATED FAQS
  1. Are direct consolidation loans subsidized?

    Direct Consolidation Loans are not subsidized. Students borrow Direct Subsidized Loans to pay tuition, room and board at ... Read Answer >>
  2. Can Direct Consolidation Loans be deferred?

    Student loans bundled into direct consolidation loans may be deferred under certain circumstances. Read Answer >>
Trading Center