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.
Direct Consolidation Loans Explained
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.
Once you roll your original loans into a direct consolidation loan you typically lose the benefits of those original loans, so consider carefully before signing on the dotted line.
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 usually references 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 Direct Consolidation Loans Work
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 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.
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 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.