What Is a Direct Consolidation Loan?
The term direct consolidation loan refers to a type of federal loan that combines two or more federal education loans into a single loan. A direct consolidation loan comes with a fixed interest rate that is based on the average rate of the loans that are consolidated. Consolidating through the direct consolidation loan program comes at no cost to the borrower. Individuals must complete an application, which is free of charge.
- A direct consolidation loan is a type of federal loan that combines two or more federal education loans into a single loan.
- The new fixed rate is based on the average rate of the loans being consolidated.
- Most federal loans are eligible for consolidation, but private loans are not eligible.
- Borrowers can consolidate once they complete school, withdraw from school, or fall below half-time student status.
- The federal government provided some relief for certain student loan borrowers because of the COVID-19 pandemic.
Understanding Direct Consolidation Loans
Direct consolidation loans allow borrowers to lower the number of loan payments they have to make each month, combining them into a single payment. These loans are facilitated by the U.S. 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, withdraw from school, or fall below half-time student status.
Loan consolidation can also give someone access to additional loan repayment plans and loan forgiveness programs. Loan forgiveness programs allow a borrower to cancel their obligation to repay all or a portion of the remaining principal and interest owed on a student loan.
The most common consolidation programs are the Teacher Loan Forgiveness Program and the 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.
The U.S. Department of Education has paused federal student loan payments—the pause will last until 60 days after the department is permitted to implement its loan forgiveness program or the related litigation is resolved. If no resolution is reached before June 30, 2023, the pause will end 60 days thereafter.
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 U.S. Department of Education at participating schools.
Before getting 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 are 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.
The consolidation of federal educational 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 with the Department of Education or its federal loan servicers.
After completing an application, the borrower confirms the loans they are seeking to consolidate, 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.
You usually lose the benefits associated with your original loans once you roll them into a direct consolidation loan.
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 is extended up to 30 years. In addition, you only have to make one payment per month. This can make it easier to keep track of your student loan balance.
You can also get a lower interest rate because direct consolidation loans have a fixed interest rate. Since July 1, 2006, all federal student loans have had a fixed interest rate. However, some loans disbursed before this date have variable interest rates. Consolidation can help turn a variable rate into a fixed one, a potential advantage when interest rates are increasing.
Borrowers may also get access to different repayment options. These types of repayment plans are available for direct consolidation loans:
- A standard repayment plan
- A graduated repayment plan
- An extended repayment plan
- The Income-Contingent Repayment (ICR) Plan
- The Pay As You Earn (PAYE) Repayment Plan
- The Revised Pay As You Earn (REPAYE) Repayment Plan
- An Income-Based Repayment (IBR) Plan
Loans come out of default status once they’re consolidated. If you’re in default on one (or all) of the loans you want to consolidate, this may be a good option for you, but you'll have to meet certain requirements. (You must make three consecutive monthly payments on the defaulted loan first or agree to repay your new direct consolidation loan through one of several different options of repayment plans.)
Borrowers can also gain access to loan forgiveness options, including the Public Service Loan Forgiveness (PSLF) Program.
You don't have to wrap everything into the consolidation loan. Applicants using the studentaid.gov site can deselect the loans that they don't want to include on the application. (The form on the website will automatically import all the federal loans under the applicant's name).
When loans are consolidated, the interest on the consolidated loan is based on a weighted average over their old loans, rounded to the nearest eighth of a percent (0.125%). This rounding means that the interest rate on a consolidated loan may be slightly higher, or slightly lower, than the average rates of their previous loans.
Borrowers should also keep in mind that their debt may actually increase. Because consolidation extends the repayment period—perhaps to 30 years—your monthly payment is lowered but this also results in you paying more money over the life of your loan.
You don't get a grace period with a direct consolidation loan; the repayment period starts immediately upon consolidation, and the first payment will be due in around 60 days. In addition, if your loans were in default, you won't get an automatic credit boost if you consolidate your loans.
Prior loan payments before you consolidated will not count towards loan forgiveness requirements. Additionally, there are some benefits you may lose by consolidating your loans. These include reduced interest rates, principal rebates, repayment incentive programs, or loan cancellation benefits that are available under the loans that you’re consolidating.
Lower monthly payments
One monthly payment
Different repayment options
Access to loan forgiveness options
A fixed interest rate that may be lower than the rates on the previous loans
Pay more interest over life of loan
No grace period
Prior loan payments do not count towards loan forgiveness requirements
You may lose some benefits by consolidating your loans
Is Direct Loan Consolidation the Right Choice?
There are several different reasons why you might choose direct loan consolidation. If tracking all of your student loan payments is difficult, consolidating all of your federal loans into a single monthly payment may be beneficial for you.
Not all federal loans are eligible for income-driven repayment plans. By opting for direct loan consolidation, you will be able to access income-driven repayment plans. You may also opt for direct loan consolidation if you want to be eligible for certain loan forgiveness programs. With an income-driven repayment plan, you can qualify for forgiveness of the remaining balance at the end of the repayment term.
Additionally, direct loan consolidation may be the right choice 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 fixed rates only.
You may qualify for the Public Service Loan Forgiveness Program if you're a government, tribal government, or nonprofit employee with federal student loans. Eligible borrowers may qualify for a limited PSLF waiver, which provides credit for previous periods of repayment. Submit your forms before the Oct. 31, 2022, deadline to see if you qualify.
On November 22, 2022, the Biden Administration and the U.S. Department of Education announced a further pause of federal student loan payments. The pause is to last either 60 days after the department is permitted to implement its loan forgiveness program or the litigation is resolved, or it is to last 60 days after June 30, 2023. The pause includes relief measures for eligible loans, including a 0% interest rate, suspension of loan payments, and stopped collections on defaulted loans.
What Is the Interest Rate on a Direct Consolidation Loan?
When you consolidate your loans, you'll 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 up to the nearest one-eighth of 1%. If the weighted average interest on the loans is 5.25%, for example, then the new interest rate will be 5.375% after consolidating.
How Can I Undo a Direct Consolidation Loan?
If you are interested in canceling your direct consolidation loan application, your 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 for streamlined payments. Borrowers can consolidate subsidized and unsubsidized Stafford loans, Supplemental Loans for Students, Federally Insured Student Loans, PLUS loans, direct loans, Perkins loans, and any other type of federal student loan.
How Long Does It Take for a Direct Consolidation Loan to Pay off Old Loans?
The terms on a consolidated loan range from seven to 30 years, depending on the balance and repayment schedule.
The Bottom Line
If you're making payments on multiple federal student loans but have trouble juggling them all, you may want to consider a direct consolidation loan. This program takes all of your loans and combines them into a single loan with a fixed interest rate. There's no credit check involved, and you don't have to pay an application fee. Keep in mind, though, that you lose any benefits associated with your other loans and you may pay more interest over the life of your consolidation loan. If you're interested, be sure to visit the Department of Education's website for more information and to fill out the application.