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.

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RELATED FAQS
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