Should You Apply for a Direct Consolidation Loan?

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  • With a Direct Consolidation Loan, you may simplify your loan repayment process by combining several federal student loans into one.  
  • This type of loan won’t lower your interest rate, but it might result in a lower monthly payment. 
  • Application for a Direct Consolidation Loan might also help you qualify for other repayment programs; however, you might lose certain borrower benefits.

Managing your student loans might be challenging for various reasons. While some individuals have a hard time keeping track of different due dates for different loans and thus miss payments, others experience financial hardship due to job loss or some other unexpected event. If you find yourself in a similar situation, you might consider loan consolidation to make it easier to stay on top of your financial obligations.

It is important to distinguish between private and federal loan consolidation. Private student loan consolidation, also known as refinancing, goes through a private lender, while federal student loan consolidation must be filed with the Department of Education. In this article, we will discuss a federal loan consolidation program ― a Direct Consolidation Loan.

The Benefits and Disadvantages of a Direct Consolidation Loan

A Direct Consolidation Loan combines several federal education loans into a single loan, resulting in a single, and potentially lower, monthly payment. This type of loan could make repayment process more manageable. You may also become eligible for other loan repayment and forgiveness programs.

Loan consolidation is not likely to lower your interest rate, and your new interest rate will be the weighted average of the loans that you consolidate. However, a consolidated loan often comes with a lower monthly payment due to an extended repayment period (from 10 to 30 years). Although lower monthly payments might decrease your debt burden on a day-to-day basis, it is important to realize that more time to pay off your loan also means paying more in interest over the life of the loan. Also, your new consolidated loan will include any outstanding interest from the original loans.

Another downside of loan consolidation is a possible loss of the benefits on your current loans, including interest rate discounts and principal rebates. Any credit for making qualifying payments under an IDR (Income-Driven Repayment) or PSLF (Public Service Loan Forgiveness) programs will likely be canceled as well.

Loan consolidation might not be the best option for those individuals who only need a short-term payment relief. If consolidation of loan terms makes no financial sense except for lowering your monthly payment, consider forbearance or deferment.

Depending on a debtor’s particular circumstances, loan consolidation might be beneficial for individuals who want to qualify for IDR plans or PSLF programs. It might also help you get current on defaulted loans. At the very least, loan consolidation could simplify the repayment process for those who find it difficult juggling several loans from different providers at once.

Eligibility Requirements for Loan Consolidation

You become eligible for consolidation right after graduation or leaving school, or when you are enrolled less than half-time. To be eligible for consolidation, your loans need to be in repayment or the grace period.

Most federal student loans are eligible for consolidation, including:

Should You Apply for a Direct Consolidation Loan?
  • Subsidized, Unsubsidized, and Nonsubsidized Federal Stafford Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students
  • Federal Perkins Loans
  • Health Education Assistance Loans
  • Health Professions Student Loans
  • Loans for Disadvantaged Students
  • Nursing Student Loans
  • Nurse Faculty Loans
  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS Loans
  • Parent Loans for Undergraduate Students
  • Auxiliary Loans to Assist Students
  • Federal Insured Student Loans
  • Guaranteed Student Loans
  • National Direct Student Loans
  • National Defense Student Loans

Although you cannot consolidate private education loans, they may be included in the total debt amount in some consolidation programs to determine the new loan terms. Federal education loans cannot be combined with Direct PLUS Loans that parents receive for their children. You also cannot consolidate defaulted loans that are being collected according to a court order or by wage garnishment.

Your current consolidated loans are not generally eligible for consolidation. However, you may be able to reconsolidate them under some circumstances. For example, you might add another eligible loan. Some IDR plans allow reconsolidation of delinquent FFEL Consolidation Loans. You may also be able to reconsolidate FFEL Consolidation Loan to qualify for the PSLF Program. Military members may reconsolidate their FFEL Consolidation Loans to avoid paying interest accrued during active duty military service.

Before consolidating a defaulted loan, you will have to make at least three consecutive monthly payments or agree to pay your new consolidated loan under one of the following plans:

  • Income-Contingent Repayment Plan
  • Income-Based Repayment Plan
  • Pay As You Earn (PAYE) Repayment Plan
  • Revised PAYE Repayment Plan

How to Apply for a Direct Consolidation Loan

The application for a Direct Consolidation Loan is free. To apply for a Direct Consolidation Loan, you have to fill out the application form on StudentLoan.gov and submit it electronically or by mail. Make sure to have all your documents available before you begin as you will have to complete the application in one session.

During your application, you will select which loans you would like to consolidate. Since the loans cannot be separated after consolidation, evaluate the effects of consolidation on each loan before including them in a Direct Consolidation Loan.

Consider excluding the loans with borrower benefits which you are likely to lose by consolidation. For example, you might decide not to consolidate your Direct Loans with other federal student loans to preserve your credit for payments toward PSLF on the Direct Loans. The same reasoning goes for excluding your Federal Perkins Loans if your current occupation makes you eligible for Perkins Loans cancellation.

At the time of your application, you will have to choose a repayment plan, based on your loan balance or income. Before submitting your application, make sure you understand your new loan terms. Until your loan consolidation is complete, you have to make payments on all loans, except the ones in a grace period, forbearance, or deferment. Your first payment will typically be due within 60 days after the loan disbursement.

If your debt burden is becoming unmanageable, contact Solvable to find the right student loan relief specialist. With our extensive database of the highest-ranking and thoroughly reviewed debt relief companies, you will find the help you need and get back on track with your finances.

 

Anna Chumakova
Author:
Anna Chumakova
Anna is a writer and editor who holds a bachelor's degree in Economics from the University of California, San Diego. Having diverse interests, Anna enjoys writing on a wide range of topics. Presently, she lives in Encinitas, California, with her husband and two cats.