Is a Direct Consolidation Loan the Best Move for You?
If you’re juggling more student loans or debt than you wanted, you’re not alone. The average college graduate from the class of 2016 left school with more than $37,000 in student debt, according to an analysis of student loan debt by Mark Kantrowitz, publisher of Cappex.com.
Many students have even more debt, with some debt loads reaching well into six figures.
But there’s more to wrangling debt than just how much you owe. While student debt can be troublesome, managing debt can be especially problematic if you’re juggling more than one payment. Because student loans are often taken out in stages during college, it’s fairly common for students to have multiple student loans with different loan servicers.
While Direct Consolidation Loans won’t make student debt go away, they do offer a solution that can help graduates streamline the debt repayment process. Keep reading to learn more about Debt Consolidation Loans, how they work, and who they’re good for.
Here’s what we’ll cover in this guide:
- How do Direct Consolidation Loans work?
- How much can I really save with a Direct Consolidation Loan?
- When does a Direct Consolidation Loan make sense?
- Income-driven repayment options
- Private student loan consolidation
- Student loan forgiveness programs
Before jumping on the consolidation bandwagon, it’s important to understand how Direct Consolidation Loans work. In short, these federally sponsored consolidation loans let you consolidate multiple federal student loans into one loan.
The perks of consolidation are obvious: Instead of paying multiple loan payments every month, you’ll complete the process with a single loan servicer and a single student loan payment to make. Consolidation with a Direct Consolidation Loan also helps you maintain access to additional loan repayment plans and forgiveness plans offered through the federal government.
While Direct Consolidation Loans can help make managing your student debt easier, it may not help you save money and could even cost you more money in the long run.
Here’s why: Direct Consolidation Loans offer a fixed interest rate that is determined by using the weighted average of the existing rates on your loans rounded up by one-eighth of a percent.
That essentially means that the interest rate on your consolidated loan might not be that much different from what you’re paying now. If you use a Direct Consolidation Loan to extend your repayment timeline, you could even pay more interest over the long run.
Because you won’t necessarily save money with this type of loan consolidation, this strategy is best for a specific type of borrower.
Here are a handful of scenarios when a Direct Consolidation Loan may make sense for your situation:
- You’re tired of juggling multiple student loan payments and crave the simplicity of making a single payment every month.
- You want to extend the repayment timeline for your loans, so you’re happy with the fact that Direct Consolidation Loans let you extend repayment for up to 30 years.
- You don’t want to pay any fees to consolidate, so you’re pleased with the fact Direct Consolidation Loans come with no application fees or prepayment penalties.
- You want to qualify for Public Service Loan Forgiveness (PSLF) or an income-driven repayment plan, but your Federal Perkins Loans do not qualify. By consolidating into a Direct Consolidation Loan, you may be eligible for PSLF or income-driven plans like the Pay As You Earn Repayment Plan or the Income-Based Repayment Plan.
When it doesn’t make sense to apply for a Direct Consolidation Loan
While there are situations where Direct Consolidation Loans can leave college graduates a lot better off, this loan consolidation method isn’t right for everyone. Here are some times you should consider options other than Direct Consolidation Loans:
- You believe you could qualify for a lower interest rate with a private lender and want to save money on interest when consolidating your loans.
- You’re worried about consolidating your loans because, once completed, Direct Consolidation Loans cannot be undone.
- Because Direct Consolidation Loans typically extend your repayment timeline, you’re worried about making more payments and paying more interest.
- You’re worried about losing benefits that are associated with your current federal loans — things like credit for flexible repayment programs, federal loan forgiveness programs, interest rate discounts, principal rebates, and loan cancellation benefits.
While Direct Consolidation Loans can be beneficial in certain situations, not everyone qualifies. If you’re interested in this type of consolidation, these are the requirements you’ll need to meet per the U.S. Department of Education:
- You must consolidate at least one Direct Loan or Federal Family Education Loan (FFEL) Program loan to qualify.
- Your loans must be in repayment or in their grace period.
- You can’t consolidate an existing consolidation loan unless you’re including another, unconsolidated loan in the new Direct Consolidation Loan.
- There are additional requirements to meet if you’re aiming to consolidate a defaulted loan. Generally speaking, you must either make satisfactory repayment arrangements (three consecutive monthly payments) before consolidation or you must agree to repay your new Direct Consolidation Loan under an income-driven repayment plan (i.e., Income-Based Repayment Plan, Pay As You Earn Repayment Plan, Revised Pay As You Earn Repayment Plan, and Income-Contingent Repayment Plan).
In addition to these requirements, it’s important to make sure your federal student loans qualify for Direct Loan Consolidation. The following list of federal loans meet the criteria for this program:
- Subsidized Federal Stafford Loans
- Unsubsidized 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)
Keep in mind that private student loans cannot be consolidated with a Direct Consolidation Loan. However, your total student debt — including private loan debt — can be used to determine how long you have to repay your Direct Consolidation Loan.
If you are certain a Direct Consolidation Loan could be the answer you’re looking for, applying is your next best step. Fortunately, you can apply for consolidation online through StudentLoans.gov or use the website to download and print an application for submission through U.S. mail.
Either way, your application will require the same set of information. Here’s what you’ll need to successfully complete your application for a Direct Consolidation Loan:
- Social Security number
- Driver’s license number
- Employer information
- Personal references
- Current student loan details such as loan code, loan servicer name and address, loan account number, estimated payoff balance
- Details for loans you don’t wish to consolidate
- Desired repayment terms
After you submit your application online or through the mail, the federal government will select a loan servicer who will consolidate your loans. As the U.S. Department of Education notes, it’s important to continue making loan payments on all loans while your loans are being consolidated in order to avoid going into default. The only exceptions are if your loans are in forbearance, deferment or your grace period.
Before you submit your application for a Direct Consolidation Loan, you’ll be able to select your desired repayment timeline. Not only can you choose an extended repayment plan that lasts up to 30 years, but you may opt for income-driven repayment plans that can ultimately lead to loan forgiveness.
Generally speaking, you will have chosen from one of the following repayment plans during the application process:
|Repayment Plans for Direct Consolidation Loans|
|Standard Repayment Plan||Pay a fixed amount for 10 to 30 years|
|Graduated Repayment Plan||Pay fixed payments that increase incrementally for up to 30 years|
|Extended Repayment Plan||Pay fixed or graduated payments for up to 25 years|
|Revised Pay As You Earn Repayment Plan (REPAYE)||Pay fixed payments of 10 percent of your discretionary income for 20 to 25 years before your loan balance is forgiven|
|Pay As You Earn Repayment Plan (PAYE)||Pay fixed payments of 10 percent of your discretionary income for 20 years before your loan balance is forgiven|
|Income-Based Repayment Plan||Pay fixed payments of 10 to 15 percent of your discretionary income for 20 to 25 years before your loan balance is forgiven|
|Income-Based Repayment Plan||Pay fixed payments of 10 to 15 percent of your discretionary income for 20 to 25 years before your loan balance is forgiven|
While there’s no “wrong” or “right” repayment plan to use in conjunction with a Direct Consolidation Loan, the selection you make will determine how much you pay toward your loans every month — and how much interest you’ll pay over the long haul.
While a shorter repayment timeline can help you pay off your loan faster and with less interest paid, your monthly payments will be higher. On the flip side, a new loan that’s paid off over 20 to 30 years may come with a lower monthly payment that’s easier to manage, but actually will cost you more interest over time.
Here’s an example:
Let’s say you now owe $55,000 on your new Direct Consolidation Loan. If you chose a 30-year repayment timeline at 7%, your monthly payment would be $365.92, and you would pay a total of $76,726.77 in combined principal and interest payments over the lifetime of your loan.
If you chose a 20-year repayment term instead, you would pay $426.41 per month but pay only $47,340.70 in interest during that time.
Make sure to consider the pros and cons of paying a smaller or bigger payment and how it will affect your repayment timeline before you select a repayment plan for your Direct Consolidation Loan.
Either way, the outcome is the same once the loan process is complete. After your loan has been consolidated, you will continue making regular monthly payments to your new student loan servicer.
If a Direct Consolidation Loan isn’t right for your financial situation, it’s important to know you have other options. The following repayment plans are offered as alternatives to Direct Loan Consolidation.
While it’s possible to qualify for income-driven repayment plans to use as your repayment plan with a Direct Consolidation Loan, you can also apply for these programs without consolidating your loans. Income-driven repayment plans all work differently, but they each have the same goal — making it easier for you to secure monthly payments you can afford.
Income-driven repayment plans rely on a specific formula to determine how much you can afford to pay each month. This formula is called “discretionary income,” and it is figured by considering the difference between your income and 150 percent of the federal poverty guideline considering your family size and state of residence.
This table offers additional details on income-driven repayment plans and the type of loans that qualify:
|Income-Driven Repayment Plans|
|Repayment Plan||Eligible Loans||Monthly Payment & Time frame|
|Pay As You Earn Repayment Plan (PAYE)||
|Revised Pay As You Earn Repayment Plan (REPAYE)||
|Income-Based Repayment Plan (IBR)||
|Income-Contingent Repayment Plan (ICR)||
If you were considering debt consolidation to save money on your monthly payments, income-driven repayment plans can help you accomplish the same goal. However, there are definitely disadvantages that come with these programs. Before you sign up, make sure you have a broad understanding of income-driven repayment plans and how they work.
Pros of income-driven repayment plans:
- Pay lower monthly payments for 20 to 25 years.
- Since payments are based on “discretionary income” requirements, those with lower incomes may pay considerably lower payments than they would under other repayment plans.
- You may have your loan balances forgiven after 20 to 25 years.
Cons of income-driven repayment plans:
- Paying student loan payments for 20 to 25 years may not be ideal for those who want to pay off debt faster.
- Your payments will rise incrementally along with your income.
- You will need to pay income taxes on loan amounts forgiven after 20 to 25 years.
If you want to consolidate your loans but aren’t the perfect candidate for a Direct Consolidation Loan, keep in mind that you can also consolidate your loans with a private lender. The process works similarly in the fact that you can consolidate several loans into a single new one. The difference is, you’ll have to shop around for a private student loan consolidation loan on your own — and you can include both federal and private student loans in the deal.
The advantages and disadvantages of choosing private student loan consolidation are as follows:
Pros of private student loan consolidation:
- Private lenders allow you to consolidate both federal and private loans into a new loan.
- You may qualify for a lower interest rate depending on your current rate and market rates set by lenders.
- You can choose among several loan consolidation companies.
- You get the simplicity of paying a single student loan payment every month.
Cons of private student loan consolidation:
- You lose out on federal benefits such as income-driven repayment plans, deferment, and forbearance any time you refinance with a private lender.
- You could qualify for higher rates than those guaranteed by the federal government.
- You need good or excellent credit to qualify for a consolidation loan with a private lender.
- If you don’t have good or excellent credit, you may need a cosigner.
Before you decide to consolidate your student loans with a private lender, it’s important to make sure you’re getting the best deal. Fortunately, you can enter your information to get a free quote for loan consolidation and compare rates from several lenders all at once.
Make sure you compare lenders in terms of quality and reviews, lowest interest rate offered, repayment plans, and all applicable fees. That way, you can ensure you’re making an “apples to apples” comparison and getting the best deal for your loans.
While income-driven repayment plans can lead to loan forgiveness, there are several other loan forgiveness programs that you may be able to apply for. Keep in mind that most loan forgiveness programs are career- or industry-based and may depend on the state in which you live.
Here are some of the options available:
Public Service Loan Forgiveness
The Public Service Loan Forgiveness Program, or PSLF, is available to college graduates who are willing to work in a qualified public service position for at least 10 years. Provided their employment helps them qualify, those who use PSLF can have all of their student loan debt forgiven after working full time in a public service position and making on-time monthly payments for 120 months, or 10 years.
While PSLF does require work in public service, many careers and positions can qualify across industries such as health care, nonprofit, and government. You may also qualify if you serve in AmeriCorps or the Peace Corps.
Federal Perkins Loan Cancellation
If you took out Federal Perkins Loans to pay for your college education, you may qualify to have your loans discharged. This program is only applicable to individuals in specific careers, however.
Currently, you may have up to 100 percent of your Perkins Loans forgiven if you’re a librarian with a master’s degree, a firefighter, a law enforcement officer, or a teacher. Applicants need to work full time for a year to qualify, and additional eligibility requirements depend on your profession.
Teachers must complete their work in a low-income or underserved area. If you have PLUS Loans only, you aren’t eligible for this program.
Other loan forgiveness programs
Keep in mind that other loan forgiveness programs may be available depending on your state of residence and your career specialty. There are unique loan forgiveness programs for doctors, just as there are special programs for dentists and lawyers.
Additional loan forgiveness programs may be offered to individuals in the military or related service positions. Check out this guide to student loan forgiveness for more details on programs for working professionals with student debt.
Before you take out a Direct Consolidation Loan, it’s crucial to conduct due diligence. While this type of loan may be ideal for your situation, there are other alternatives to consider as well. The following questions and answers can help you make your decision.
What are the benefits of consolidating student loans with the federal government or a private lender?
If you’re juggling multiple loans and payments, consolidating can streamline your loans and leave you with a single payment to make every month. Depending on whether you choose a Direct Consolidation Loan or consolidate with a private lender, it may also be possible to secure a lower interest rate and save money on interest. Consolidating your loans can potentially help you secure a lower monthly payment that works better with your budget and lifestyle.
Can you “undo” a Direct Consolidation Loan?
Because a Direct Consolidation Loan takes the place of all your prior student loans, you cannot undo the process once you’ve consolidated. This is yet another reason it’s important to understand consolidation and make sure it’s right for you before you pull the trigger.
Do Direct Consolidation Loans come with any fees or prepayment penalties?
Direct Consolidation Loans don’t require an application fee, nor are there any additional fees or charges for consolidating your federal student loans. You’re also free to prepay your loan or pay it off early without the fear or penalties.
Can private student loans be rolled into a Direct Consolidation Loan?
Unfortunately, no. Only qualifying federal student loans can be consolidated into a Direct Consolidation Loan. If you have private loans to consolidate, you should consider refinancing or consolidating with a private student loan lender.
Can Parent PLUS Loans originally taken out by parents be consolidated with federal loans taken out by the child?
Unfortunately, the answer is no. According to the U.S. Department of Education, “Direct PLUS Loans received by parents to help pay for a dependent student’s education cannot be consolidated together with federal student loans that the student received.”
When is someone eligible to consolidate their student loans with a Direct Consolidation Loan?
You may qualify for a Direct Consolidation Loan after you graduate from college, once you leave school, or if you drop below half-time enrollment.