What to Know About Direct Loan Consolidation

A direct loan consolidation is a process that allows a borrower to combine or consolidate different federal student loans into just one loan. The result of a direct loan consolidation is a having only one monthly payment instead of many monthly payments. Direct loan consolidation is a very popular method that individuals use in order to avoid paying high monthly payments, particularly on student loans.

Direct loan consolidation is a good tool for students or former students who are managing finances after taking out student loans. It can help provide both immediate and long term benefits. Some benefits of a direct loan consolidation include:

Cut a monthly student loan payment, sometimes up to up to 52 percent.

Simplifying finances by just having one payment a month with a fixed-rate loan

Improving one’s credit through the consolidation and payoff process.

No fees, credit checks, or application charges.

No cost for a direct loan consolidation

Potential decrease in interest rate, although this is usually less than one percent.

One of the most helpful benefits of a direct loan consolidation is payment relief. By combining multiple loans into one simple consolidated loans, it allows the repayment term to be lengthened from the typical ten years up to thirty years, depending on the sum of the loans.

By having a lower monthly payment, it allows an individual to have more available money that can be used to take care of other living expenses, such as car payments, career-related necessities, or housing expenses. Because a direct loan consolidation does not have any penalties for overpayment, it is possible to make larger payments if desired to reduce the repayment term of the loan when it becomes affordable to do so.

However, there are also some drawbacks to direct loan consolidation including:

Increased total cost of loans due to longer repayment period, resulting in more interest.

Potentially losing benefits of individual loans, such as deferred interest benefits or forgiveness

Inability to consolidate private educational loans into a federal consolidation loan.

Applicable Loans for a Direct Loan Consolidation

The majority of federal student loans are eligible for direct loan consolidation, such as unsubsidized and subsidized Direct and FFEL Stafford Loans, Supplemental Loans for Students (SLS), Direct and FFEL PLUS Loans, Federal Perkins Loans, Health Education Assistance Loans, Federal Nursing Loans, and certain existing consolidation loans. However, private education loans are not eligible for direct loan consolidation. Individuals who are in default must first meet certain requirements before consolidating loans.

Direct Consolidation Loan Interest Rates

The set interest rate of a direct consolidation loan is calculated as the weighted average of interest rate from all the loans being consolidated. The rate is fixed over the life of the loan and is rounded up to the nearest 1/8th of 1 percent and cannot exceed 8.25 percent.