If you’ve borrowed multiple student loans, keeping track of your student loans can be a little complicated—especially if your loans are held by multiple different servicers. A Direct Consolidation Loan may help you get a better handle on your student loan debt and repayment process.
Here, we explore Direct Consolidation Loans so that you will have enough information to decide whether or not consolidation is the right move for you.
What is a Direct Consolidation Loan?
Direct Consolidation Loans are a special type of federal student loan created under the William D. Ford Federal Direct Loan Program. They are made available to all borrowers of federal student loans.
At its heart, a Direct Consolidation Loan is a single new loan which you borrow to replace all of the individual student loans which you are currently borrowing. The result of consolidation is that you will have a single monthly payment, made to a single servicer.
What is the interest rate on a Direct Consolidation Loan?
If the individual loans that you are consolidating have different interest rates, your Consolidation Loan will carry its own new interest rate. This interest rate will be the weighted average of all of the loans that were consolidated. Typically, it is rounded up to the nearest one-eighth of a percent. Though most federal student loans carry a maximum possible interest charge, consolidation loans do not have a cap.
Unfortunately, there is no way to lower your student loan interest rate through consolidation. To achieve that, you will need to refinance your loan with a private lender.
Do Direct Consolidation Loans have any fees?
Though most federal student loans charge a loan origination fee, student loan consolidation does not. You have already paid an origination fee with your original fee; the government will not charge you again.
How much can you consolidate?
There is no limit to how much you can consolidate into a single new Direct Consolidation Loan. Because you have already borrowed the money from the federal government under the legal limitations at the time of disbursement, you have already met these limits.
What types of student loans can be consolidated?
Generally speaking, most federal student loans can be consolidated. This includes:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Federal Stafford Loans
- Direct Parent PLUS Loans
- Direct Graduate PLUS Loans
- Federal Perkins Loans
A variety of other federal student loans can also be consolidated.
It is important to note that private student loans cannot be consolidated with federal student loans. To consolidate your private student loans, you would need to refinance them through a private lender.
Similarly, you cannot consolidate Parent PLUS Loans together with federal student loans borrowed directly by students. Individual Parent PLUS Loans can be consolidated together, though.
Direct Consolidation Loan Eligibility
In order to consolidate your federal student loans, you must:
- Be consolidating loans that are in repayment or a grace period
- Rehabilitate a defaulted loan, if you wish to consolidate it
How to Apply for a Direct Consolidation Loan
In order to apply for federal student loan consolidation, you must submit an application, either online or by paper. You can complete the online application for a Direct Consolidation Loan here.
Direct Consolidation Loan Repayment Plans
When you consolidate your federal student loans, the U.S. Department of Education is still your lender. The new loan will be serviced by one of 11 federal student loan servicers. Your servicer will accept your monthly payments, advise you of your repayment options, and otherwise manage your loan.
Borrowers with Direct Consolidation Loans are typically eligible to enroll in the following repayment plans:
- Standard Repayment Plan
- Graduate Repayment Plan
- Extended Repayment Plan
- Revised Pay As You Earn Repayment Plan (REPAYE), not including Parent PLUS Loans
- Pay As You Earn Repayment Plan (PAYE), not including Parent PLUS Loans
- Income-Based Repayment Plan (IBR), not including Parent PLUS Loans
- Income-Contingent Repayment Plan (ICR)
- Income-Sensitive Repayment Plan
If you would like to change the repayment plan on your Direct Consolidation Loan, simply contact your loan servicer.
Alternatives to Direct Consolidation Loans
It is important to note that when you consolidate your federal student loans into a Direct Consolidation Loan, you may be inadvertently giving up certain key benefits, such as interest rate discounts and forgiveness options. If these benefits are important to you, then consolidation may not be right for you. If your primary reason for consolidating your student loans is to make it easier to keep track of your loans, consider downloading a student loan spreadsheet instead.
If you were interested in student loan consolidation because you wanted to lower your interest rate, then you may want to consider refinancing your loans through a private lender. While this can result in a lower interest rate, it will remove the benefits enjoyed by federal student loans, so it is important to understand what you are forfeiting before making up your mind. Therefore, it’s important to weigh the pros and cons of refinancing before you make a decision.
Learn more about private student loans here.