While the federal program allows students loan borrowers to consolidate their loans for streamlined payments, it comes with benefits and drawbacks.
Consolidating multiple loans can be a smart decision for some borrowers to stay on top of their payments since it bundles multiple loans into one single loan – simplifying repayment.
Direct loan consolidation allows borrowers to take advantage of different income-based repayment programs, which can lead toward loan forgiveness, depending on the borrower's repayment and circumstances.
But unlike some private loan consolidations, direct doesn't offer lower interest rates through consolidation.
Under the program, a borrower can consolidate subsidized and unsubsidized Stafford loans, Supplemental Loans for Students, Federally Insured Student Loans, PLUS loans, direct loans, Perkins loans and just about any other type of federal student loan.
Direct consolidiation also allows borrowers to retain many of the unique benefits of a federal student loan along with other consumer protections such as forbearance or deferment, experts say.
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Here's what borrowers need to know about a direct consolidated loan.
1. Direct consolidation adds around 0.125 percent in interest. When a borrower consolidates federal student loans under direct, the government exchanges their prior loans for a single consolidated loan.
The borrower receives a weighted interest average on the prior loans under the consolidated one, rounded up by one-eighth of 1 percent.
If the weighted average interest on the loans is 5.25 percent, for example, then the new interest rate will be 5.375 percent after consolidating.
2. Borrowers should do the math before consolidating with a loan consolidation calculator. There are several online tools that borrowers can use to calculate the new interest rate.
Experts recommend using an online consolidation calculator on studentloans.gov or loanconsolidation.ed.gov. As part of the online direct application, the studentloans.gov website will also calculate the interest rate before the borrower clicks "submit."
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But a borrower can calculate the weighted average without an online tool. The new rate can be calculated by multiplying the interest rate with each loan, summing all of that and then dividing by the total loan balances.
3. Term limits can change under consolidation. Unlike most student loans that default to a 10-year standard plan, the terms on a consolidated loan range from seven to 30 years, depending on the balance and repayment schedule.
|Total federal loan balance||Direct consolidation loan repayment terms|
|Less than $7,500||10 years|
|$7,500 to $9,999||12 years|
|$10,000 to $19,999||15 years|
|$20,000 to $39,999||20 years|
|$40,000 to $59,999||25 years|
|$60,000 or more||30 years|
4. Consolidation is limited to once every 180 days. "If you do two consolidations within 180 days, the second consolidation will be added to the first consolidation," says expert Mark Kantrowitz, publisher of Cappex.com, a college and scholarship search site.
So a borrower isn't able to make two separate direct consolidations during that time, he says.
5. A direct loan or consolidation is needed to enroll in Public Service Loan Forgiveness. PSLF eliminates, or forgives, federal student loans for borrowers employed full time in an eligible public service or nonprofit job who make 120 eligible on-time payments.
"Only direct loans are eligible for PSLF," says Nick Demeester, manager of student loan services at GreenPath Financial Wellness.
This includes older federal consolidated loans under Federal Family Education Loans, called FFEL, which existed before direct's introduction in 2010. FFEL loans aren't eligible for Public Service Loan Forgiveness unless they're consolidated under direct.
But borrowers with FFEL are still eligible for Teacher Loan Forgiveness.
If a borrower reconsolidates a direct loan, they reset the clock on qualified payments toward loan forgiveness, Demeester says. "So if you're close to making five years of PSLF payments and reconsolidate, then you're resetting the clock and those payments would start at zero."
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6. Federal student loan borrowers can strategize which loans to consolidate. "You don't have to wrap everything into the consolidation loan," says Heather Jarvis, an attorney and student loan expert.
Applicants using the studentloans.gov site can deselect the loans that they don't want to include on the application, which automatically imports all the federal loans, Jarvis says.
Someone can strategize this way: A borrower with a FFEL consolidated loan, for instance, that has a lower interest rate can keep that loan separate and move the other federal loans to direct consolidation. But it does mean two different repayment plans.
7. Consolidation may improve your repayment options. "If you have older federal loans you might be able to improve your options by direct consolidation," Jarvis says.
The Department of Education's Pay As You Earn, or PAYE, income-driven program is only available under direct and to newer borrowers who took out loans after October 2007. But older borrowers with federal student loans, such as those with Stafford loans, can qualify for Revised Pay As You Earn, known as REPAYE, under direct loan consolidation.
8. One benefit of consolidation is it can rehabilitate loans in default. Consolidating loans that are in default can be quicker than rehabilitating multiple loans, experts say.
"It's really the impact to the credit report," Demeester says, who says it can often be quicker to rehabilitate one consolidated loan than multiple loans. "The rehabilitation can remove the default status from the credit report. And if they're in default, they're at risk of wage garnishment."
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