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The Ultimate Guide to Student Loan Consolidation

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Ultimate Guide to Student Loan ConsolidationIf you have several federal student loans, consolidating may be an option to consider. In this guide, you’ll learn everything you need to know about federal student loan consolidation.

What is the Direct Consolidation Loan?

A Direct Consolidation Loan is made by the U.S. Department of Education allowing you to combine one or more federal student loans into one new loan. This results in a single monthly payment instead of multiple payments. With a Direct Consolidation Loan, you gain access to additional repayment plans such as Income-Drive Repayment and Loan Forgiveness programs.

Why consolidate federal student loans

You may want to consolidate to simplify your repayment and possibly lower payments. It’s common for borrowers to deal with 8-12 separate student loans, which means 8-12 payments and 8-12 due dates each month. After consolidating, you get one bill from one lender (Department of Education) to pay once a month.

Benefits of a Direct Consolidation Loan:

  • can simplify your loan repayments to one payment
  • lower your monthly bill by extending repayments up to 30 years
  • access to alternative payment plans
  • switch from a variable-rate to a fixed interest rate

How much does it cost?

It’s free to consolidate. Federal student loan consolidation is through the federal government, not a private lender. Consolidating is a simple process with no application fee.

Be careful with private companies offering to help you apply for Direct Consolidation Loan, for a fee. These companies are not affiliated with the US Department of Education or its servicers.

How Direct Consolidation Loan works

Consolidating your federal student loans have no credit requirement. It’s best used to turn multiple loan bills into one monthly bill. However, a federal loan consolidation won’t cut your interest rate.

With federal loan consolidation, the Department of Education pays off the original loans and issues a new Direct Consolidation Loan. You’re able to consolidate once you graduate, left school or enrolled less than half-time. Additionally, you don’t have to consolidate all your eligible federal loans.

Consider federal consolidation if you:

  • desire the ease of a single loan payment
  • want to be eligible for income-driven repayment plans or loan forgiveness
  • in default and need to

Federal student loan consolidation can cause you to lose federal benefits such as loan cancellation or forgiveness benefits. Consider the reason you want to consolidate such as part of your student loan payoff strategy.

What loans can be consolidate

Private student loans are not eligible for consolidation. Most federal student loans, including the following, are eligible for consolidation:

  • 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 and 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

Additionally, Direct Parent PLUS Loans cannot be consolidated together with your student loans.

You can’t consolidate private loans into a Direct Consolidation Loan. Instead, consider student loan refinancing.

Interest Rates

A Direct Consolidation Loan has a fixed interest rate for the life of the loan. After consolidating federal loans, your new fixed interest rate will be the weighted average of your previous interest rate on all loans being consolidated, rounded up to the next ⅛ of 1%. So, for instance: If the average comes to 5.15%, your new interest rate will be 5.25%. There is no cap on the interest rate of a Direct Consolidation Loan.

Repayments

Direct Consolidation Loan repayment begins 60 days after the loan is disbursed or sooner. The loan servicer will inform you when your first payment is due. Typically, repayment terms range from 10 to 30 years. With a consolidated loan, you’re now able to choose a different repayment plan. You’ll select a repayment plan when you apply for a Direct Consolidation Loan.

There are several repayment plans including income-driven repayment plans, which base your monthly payment amount on your income and family size. You may have the option to repay your Direct Consolidation Loan through Income-based Repayment, Income-Contingent Repayment Plan or Pay As You Earn (PAYE). And can change the repayment plan in the future, if necessary.

You can repay your student loans at any time and pay off the entire balance without any prepayment fees.

How to Consolidate Federal Student Loans

You can apply for a Direct Consolidation Loan online. After submitting your application, the servicer you selected will complete the actions required to consolidate your eligible loans. The consolidation servicer will be your point of contact. Reach out to the servicer for any questions related to your application.

Continue making payments on your student loans until the consolidation is completed. Your servicer will tell you when the previous loans have been paid off. If you’re in deferment, forbearance, or grace period, then payments on loans are not required while awaiting your consolidation.

How to qualify

Ideally, you would qualify for debt consolidation after graduation, or when you leave school or become enrolled less than half-time.

Requirements to Consolidate Federal Loans

You must have at least one Direct loan or Family Federal Education Loan (FFEL) that is in a grace period or in repayment. In order to consolidate defaulted loans, you must make arrangements to make them satisfactory.

You cannot consolidate an existing consolidation loan unless you include an additional Direct loan or FFEL into the consolidation. There may be certain conditions that allow you to reconsolidate FFEL loans.

Where to apply

Complete the application on StudentAid.govYou’ll need to finish the application in one session. Set aside about 30 minutes. Before starting, gather the documents listed in the “What do I need?” section before you start.

  1. Choose which loans you want to consolidate.
  2. Select a repayment plan.
  3. Pick a loan servicer. 

Read everything before submitting the form online.

Pros and Cons of Federal Loan Consolidation

Pros

  • Simplify loan repayment by giving you a single loan with just one monthly bill.
  • Lower your monthly payment by giving you a longer period of time (up to 30 years) to repay loans.
  • Access to additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF).
  • Switch any variable-rate loans to a fixed interest rate.

Cons

  • Extended loan repayment can mean paying more in interest.
  • Interest may accrue on a higher balance if unpaid interest is added to the original principal balance.
  • Lose certain borrower benefits such as interest rate discounts, principal rebates, or some specific loan cancellation benefits.
  • Consolidating all student loans will cause you to lose credit for any payments counted for loan forgiveness programs.

Difference between consolidation and refinancing

There is an important distinction between just “consolidating” a loan and “refinancing” it.

Consolidation is combining multiple federal loans that may be serviced by various servicers into one new loan with one servicer. When consolidating, your credit and ability to repay is not considered. With consolidation, the loan remains owned by the US Department of Education and maintains its federal benefits.

On the other hand, refinancing is helpful when you’re looking to lower your interest rate and want a shorter term. Refinancing is offered by private lenders. The private lender pays off both federal and private student loans and underwrites a new private loan with a new rate and term. Learn more about student loan refinancing.

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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