A federal Direct Consolidation Loan allows borrowers to combine multiple federal education loans into one singe loan. The result for the borrower is a single monthly payment made to a single loan servicer instead of multiple payments made to multiple servicers. Loan consolidation also gives borrowers access to additional loan repayment plans and forgiveness programs that might not otherwise be available.
A Direct Consolidation Loan has a fixed rate of interest for the life of the loan. This fixed rate is calculated as the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent. There is no cap on the interest rate of a Direct Consolidation Loan.
Pros of Direct Consolidation Loans
- Borrowers with federal student loans that are with different loan servicers can simplify loan repayment by consolidating into a single loan, serviced by one servicer with just one monthly payment. The consolidation loan pays off and replaces the prior loans.
- Consolidation can lower the borrower’s monthly payment by providing a longer period of time (up to 30 years) to repay the Consolidation loan.
- Variable-rate loans may be consolidated into a fixed interest rate.
- If a borrower consolidates loans other than Direct Loans (Perkins, Stafford, PLUS, FFEL), consolidation gives access to income-driven repayment plan and loan forgiveness options that were otherwise unavailable including Public Service Loan Forgiveness (PSLF).
- Direct consolidated loans can be re-consolidated if combined with other qualifying loans.
Cons of Direct Consolidation Loans
- Because consolidation usually increases the repayment period, borrowers will likely make more payments and pay more in interest than would be the case if the loans were not consolidated.
- Any outstanding interest on the loans that are consolidated become part of the original principal balance on the consolidation loan, which means that interest may accrue on a higher principal balance than might have been the case if not consolidated (“Capitalized” = interest on interest).
- Consolidation may result in the loss of certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with the current loans.
- If current loans are being paid under an income-driven repayment plan, or if the borrower has made qualifying payments toward Public Service Loan Forgiveness (PSLF), consolidation will result in the loss of credit for any payments made toward income-driven repayment plan forgiveness or PSLF. However, any such loans can be excluded from a Direct Consolidation Loan preserving credit for any payments made toward income-driven repayment plan forgiveness or PSLF.
What Loans Are Eligible for Consolidation?
Generally, most federal student loans are eligible for consolidation including the following:
- Subsidized Federal Stafford Loans
- Unsubsidized and Nonsubsidized Federal Stafford Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students
- Federal Perkins Loans
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
- Federal Insured Student Loans
- Guaranteed Student Loans
- National Direct Student Loans
- National Defense Student Loans
- Parent Loans for Undergraduate Students
- Auxiliary Loans to Assist Students
What Loans Are Not Eligible for Consolidation?
Private student loans are not eligible for consolidation. However, for some Direct Consolidation Loan repayment plans, the total amount of the borrower’s education loan debt—including any private education loans—determines how long the borrower has to repay the Direct Consolidation Loan.
How to Qualify for a Direct Consolidation Loan
The loans to be combined must be in repayment or in the grace period (not in default).
Existing consolidation loans cannot be re-consolidated unless an additional eligible loan is included in the consolidation.
To consolidate a defaulted loan, the borrower must either make satisfactory repayment arrangements (three consecutive monthly payments) on the loan before consolidation, or the borrower must agree to repay the new Direct Consolidation Loan under the Income-Based Repayment Plan, Pay As You Earn Repayment Plan, Revised Pay As You Earn Repayment Plan, or Income-Contingent Repayment Plan.
To consolidate a defaulted loan that is being collected through garnishment, or that is being collected in accordance with a court order after a judgment was obtained, the borrower cannot consolidate until the wage garnishment order has been lifted or the judgment has been vacated.
Repayment of a Direct Consolidation Loan
Repayment of a Direct Consolidation Loan begins within 60 days after the loan is disbursed.
If any of the loans included in the consolidation are still in the grace period, the borrower has the option of indicating on the Direct Consolidation Loan application the application should be delayed until the end of grace period. Repayment on the new Direct Consolidation Loan will begin at the end of the grace period.