Direct Consolidation Loan, What You Should Know Before Applying

 

Direct Consolidation Loan: When you have multiple federal student loans you may be eligible for the Federal Direct Consolidation Loan. It opens access to income-driven repayment and loan forgiveness plan.

Direct Consolidation Loan, What You Should Know Before Applying

Paying back your loan can be very challenging most times. Especially borrowers with multiple loans, it then becomes a burden to you. Repayment turns into a delicate balancing act that must account for multiple loan payments with different due dates and budgetary limits.

Existing set of loans can be consolidated into a single loan that can be payed off. Used to simplify both private and federal student loan repayment, but borrowers with federal loans from the Department of Education may want to first consider a Direct Consolidation Loan.

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Direct Consolidation Loan

A direct consolidation loan is a type of federal loan that combines two or more federal education loans into a single loan with a fixed interest rate based on the average rate of the loans being consolidated.

Thinking of going ahead in consolidating your Federal loans? Below are things you need to consider;

  • New Fixed Rate: Consolidating loans through the Direct Consolidation Loan, the new fixed rate will be based on the “weighted average of the existing loan rates…rounded up to the nearest one-eighth of one percent.”
  • Simplified Loan Repayment: Once federal loans are consolidated, repayment will consist of a single monthly payment made to a single loan servicer—assuming all federal loans are consolidated.
  • Lower Payments: It allows borrowers access to a lower payment by extending the repayment terms to a maximum of 30 years. However, borrowers should keep in mind that extended repayment terms and lower payments often result in more interest and therefore a more expensive loan.
  • Additional Loan Repayment Plans: The federal government has created numerous repayment plans, many of which are income-driven. This includes the Income-Based Repayment Plan (IBR), Revised Pay As You Earn Plan (REPAYE), and the Income Contingent Repayment Plan (ICR). Many of these plans decrease the burden of repayment by basing monthly payments on a percentage of the borrower’s discretionary income (10% to 20%, based on the plan). Additionally, these plans also typically offer loan forgiveness after 20 to 25 years of eligible payments.
  • Public Service Loan Forgiveness (PSLF): Some borrowers may find that loan consolidation results in access to the Public Service Loan Forgiveness plan. Under this plan, full-time government and not-for-profit employees may be eligible for loan forgiveness after 120 qualifying monthly payments.

Pros

  • Direct consolidation can greatly simplify loan repayment by giving you a single loan with just one monthly bill.
  • Consolidation can lower your monthly payment by giving you a longer period of time (up to 30 years) to repay your loans.
  • If you consolidate loans other than Direct Loans, consolidation may give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF).
  • You’ll be able to switch any variable-rate loans you have to a fixed interest rate.

Cons

  • Because consolidation usually increases the period of time you have to repay your loans, you will likely make more payments and pay more in interest than would be the case if you didn’t consolidate.
  • When you consolidate your loans, any outstanding interest on the loans that you consolidate becomes part of the original principal balance on your consolidation loan, which means that interest may accrue on a higher principal balance than might have been the case if you had not consolidated.
  • It may also cause you to lose certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with your current loans.
  • If you’re paying your current loans under an income-driven repayment plan, or if you’ve made qualifying payments toward Public Service Loan Forgiveness, consolidating your current loans will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness or PSLF.

Consolidated LoansConsolidated Loans

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
  • Direct Unsubsidized Loans
  • PLUS Loans
  • FFEL Consolidation Loans and Direct 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

Private education loans are not eligible for consolidation, but for some Direct Consolidation Loan repayment plans, the total amount of your education loan debt—including any private education loans—determines how long you have to repay your Direct Consolidation Loan.

Requirements to Direct Consolidate a Loan

Here are some of the eligibility requirements for receiving a Direct Consolidation Loan:

  • The loans you consolidate must be in repayment or in the grace period.
  • Generally, you cannot consolidate an existing consolidation loan unless you include an additional eligible loan in the consolidation.
  • Under certain circumstances, you may reconsolidate an existing FFEL Consolidation Loan without including any additional loans.
  •  If you want to consolidate a defaulted loan, you must either make satisfactory repayment arrangements on the loan before you consolidate, or you must agree to repay your new Direct Consolidation Loan under the Income-Based Repayment Plan, Pay As You Earn Repayment Plan, Revised Pay As You Earn Repayment Plan, or Income-Contingent Repayment Plan.

Applying for a Direct Consolidation Loan

To apply for a Direct Consolidation Loan, borrowers should visit StudentLoans.gov, where they can complete and submit the online application. Borrowers can also print, complete, and mail the application, if they prefer.

Applying for a Direct Consolidation Loan

To complete the form, borrowers must be able to provide the following:

  • Basic borrower information (name, address, SSN, etc.)
  • Two references (adults who do not live with the applicant and have known them for three years or more)
  • The loans to be included in the consolidation (including the name of servicer or loan holder, account number, and estimated payoff amount). Note that this information can be found on the National Student Loan Data System (NSLDS).
  • Loans that are not included in the consolidation but should be considered when determining repayment.
  • The end date of loans in grace periods if there is a desire to delay the consolidation until the grace period ends.

For some borrowers, the Direct Consolidation Loan can make repayment easier, particularly through a single monthly payment and access to income-driven repayment programs; however, federal student loan consolidation may not be right for everyone.

If you have questions about the Direct Consolidation Loan, visit the Federal Student Aid website managed by the U.S. Department of Education or contact the Student Loan Support Center at 1.800.557.7394.

Focus Point

Federal loan consolidation, on one hand, is only for federal loans. The government uniformly set eligibility, rates, and terms, regardless of what company is servicing the loans.

While private loan consolidation rates vary based on the lender and the applicant’s credit history, federal consolidation loan rates are based on the average rate of all loans included.

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