Review: Federal Direct Student Loan Consolidation

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In case dealing with student loans isn’t confusing enough, you probably have multiple student loans with several different loan servicers. According to Saving for College, the typical number of student loans for graduates is eight to 12 different loans. That means remembering up to a dozen separate payment due dates, monthly minimums, and loan servicers.

If that sounds overwhelming, one option is direct federal loan consolidation, which can simplify your repayment. Read on to learn more about the benefits of consolidation and learn how to consolidate federal student loans.

What is federal student loan consolidation?

Federal loan consolidation is a method of managing your student loans. If you have multiple federal loans, taking out a Direct Consolidation Loan can streamline your payments, combining them into one big loan.

What loans are eligible for consolidation?

Most federal loans are eligible for federal loan consolidation; however, private student loans are not. The following loans can be combined in a Direct Consolidation Loan:

  • Auxiliary Loans to Assist Students
  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • Federal Insured Student Loans
  • Federal Perkins Loans
  • FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
  • Guaranteed Student Loans
  • Health Education Assistance Loans
  • Health Professions Student Loans
  • Loans for Disadvantaged Students
  • National Direct Student Loans
  • National Defense Student Loans
  • Nursing Student Loans
  • Nurse Faculty Loans
  • Parent Loans for Undergraduate Students
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Subsidized Federal Stafford Loans
  • Supplemental Loans for Students
  • Unsubsidized and Non-subsidized Federal Stafford Loans

How is the interest rate on Direct Consolidation Loans calculated?

Direct Consolidation Loans have fixed interest rates, meaning your interest rate will stay the same for the length of the loan. The interest rate is determined by using the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent.

How long is the repayment term after consolidation?

When you consolidate your debt, you can choose a new repayment plan and term. Repayment terms can range from 10 to 30 years in length.

Benefits of federal loan consolidation

Consolidating federal student loans has three main perks:

1. You’ll get one easy payment

You likely had to take out multiple student loans to pay for college. Each loan has its own payment due date, loan servicer, and monthly minimum to remember, making them difficult to manage.

When you consolidate your debt, you’ll combine all your eligible federal loans together. Moving forward, you’ll have one loan, one simple monthly payment, and only one loan servicer.

2. You can reduce your monthly payment

If you want to get a lower monthly payment, consolidating your loans can be an effective strategy. You can choose a new repayment plan, with terms as long as 30 years. With a longer repayment term, you can get a significantly smaller monthly payment that gives you more breathing room in your monthly budget.

3. You may be able to access income-driven repayment plans and loan forgiveness

Only select federal loans are eligible for income-driven repayment (IDR) plans. However, some loans that aren’t normally eligible will become eligible for IDR plans — and loan forgiveness — after you consolidate with a federal Direct Consolidation Loan.

Under an IDR plan, the loan servicer caps your payments at a percentage of your discretionary income, and your repayment term is extended. Some people qualify for payments as low as $0.

Drawbacks to loan consolidation

Consolidation can sound like a lifesaver, especially when you’re juggling multiple federal loans. However, it’s not for everyone. Keep these issues in mind before moving forward.

1. You’ll likely pay more in interest over time

With federal Direct consolidated loans, you can opt for a longer repayment term. In fact, you could end up with a term as long as 30 years. While a longer repayment term could dramatically lower your monthly payments, it can cost you over the long run.

With a longer term, there’s more time for interest to accrue over the length of the loan. You could pay thousands more than you would have if you stuck to a shorter loan term.

2. You may lose some borrower benefits

After you consolidate, you may lose out on some borrower benefits that you have with your original loan servicer. For instance, you might lose interest rate discounts, principal rebates, or loan cancellation benefits associated with your current loans.

3. You’ll lose credit for payments made toward forgiveness programs

If you’ve made payments under an IDR plan and are pursuing loan forgiveness through IDR forgiveness or Public Service Loan Forgiveness, you’ll lose credit for the payments you’ve made to date when you consolidate.

That can be a significant drawback. If you’ve made several years of qualifying payments toward forgiveness and consolidate your debt, you’ll have to start over completely.

How to apply for a federal Direct Consolidation Loan

You can apply for a Direct Consolidation Loan online at StudentLoans.gov after you graduate, leave school, or drop below half-time status as a student. 

There is no application fee, so you can consolidate your loans without paying any money. According to the Federal Student Aid department, most people can finish the application in under 30 minutes. To complete the application, follow these steps:

  1. Enter your personal information: You’ll need to type in your name, address, Social Security number, date of birth, driver’s license number and issuing state, employer name and contact information, and your telephone number.
  2. Select two references: The application asks that you enter information for two references. Your references must not live with you, and they must have known you for at least three years.
  3. Choose which loans you want to consolidate: Using the codes listed on the application, list the federal loans you wish to consolidate. You’ll have to write down the code, the loan servicer’s information, the loan payoff amount, and your account number.
  4. Pick a repayment plan: When you consolidate, you can choose an alternative payment plan. You can pick a Standard Repayment Plan, Extended Repayment Plan, Graduated Repayment Plan, or one of the four IDR plans.
  5. Read and agree to the necessary disclosures: Make sure you fully read the application, especially the section on repayment. That way, you’ll understand when your payments are due and the terms of the loan.

Once you submit the application, the consolidation loan servicer will take the next steps to consolidate your loans. Until you receive confirmation from the new loan servicer that the process is finished, keep making payments on your current loans to avoid delinquency.

Consolidating federal student loans vs. refinancing

People often use the words consolidation and refinancing interchangeably. However, they are very different processes. Loan consolidation is only for federal loans, and the interest rate you have is based on the weighted average of your current debt.

By contrast, student loan refinancing is for both federal and private student loans. When you refinance your loans, you work with a private lender rather than the U.S. Department of Education to take out a loan for the amount of your current debt. You use your new loan to pay off your old debt; going forward, you’ll have just one easy payment and one loan servicer.

So what makes refinancing different than consolidation? There are some key benefits that refinancing offers over federal student loan consolidation.

  • You can save money: When you refinance, you can qualify for a lower interest rate. Over the repayment term, a lower rate can help you save thousands of dollars.
  • You can pay off your debt faster: With a lower interest rate, more of your monthly payment goes toward the principal rather than interest. If you keep making the same monthly payment, you can pay off your student loans months or even years ahead of schedule. Awesome, right?
  • You can combine private and federal student loans: You may have taken out both federal and private loans to pay for college. Instead of having to manage them separately, student loan refinancing allows you to combine your debt.

There are some drawbacks to student loan refinancing, especially if you have federal loans. However, it can be a smart strategy for many borrowers.

If you decide that refinancing is right for you, use Purefy’s Compare Rates tool to get quotes from top student loan refinance lenders.