If you’ve taken out federal student loans, then eventually they’ll need to be repaid. If you’ve already graduated or are close to it, the 6-month grace period will end sooner than you’d like. If you’re looking for options and you have multiple student loans through the federal government, you might be interested in a Direct Consolidation Loan.
A Direct Consolidation Loan combines all of the loans into one, allowing you to make one payment per month. That’ll make it easier to organize your bills each month.
How Do I get a Direct Consolidation Loan?
In order to be eligible, you simply need to have federal student loans you want to consolidate; it’s that simple. You’ll also need to fill out the Federal Direct Consolidation Loan Application and Promissory Note, and there’s no fee to do so.
If you start filling out the application, you’ll have to finish it all in one session – about 30 minutes. The website also offers a read-only version of the application so you can see what information you’ll need and what you’ll be asked.
What Loans are Eligible for Consolidation?
Just about any kind of federal loan can be rolled into a Direct Consolidation Loan. That includes subsidized and unsubsidized Stafford loans, Perkins loans, PLUS loans, and many other types as well. In addition, you won’t lose your other federal options such as deferment or forbearance; if you consolidate and then find yourself in a financial hardship later, you can still be approved for those even with a Direct Consolidation Loan.
If you’re already in default, consolidating can help rehabilitate your credit, too. Defaulting on a student loan can wreak havoc on your credit for years, as well as result in wage garnishment and loss of federal tax refunds. Consolidation might be a good option since it removes that big “default” status from your credit report.
There are, however, a few caveats to a Direct Consolidation Loan, so before you run off and fill out the application, you should be aware of them. There are situations where a Direct Consolidation Loan may not be right for you.
The Fine Print of a Direct Consolidation Loan
A Direct Consolidation Loan has an interest rate based on a weighted average of all of your current loans being put into the consolidation and rounded to the nearest .125 percent. If you have five loans and the weighted average interest rate is 4.82 percent, that rate will be rounded up by one-eighth of a percent and you’ll have a new rate of 4.875 percent.
Given this interest rate, you cannot actually save money on a federally consolidated loan since there is no actual reduction in interest. In fact, you are more likely to spend more over the life of a loan if you opt for a longer repayment term.
If you’re already familiar with the various income-driven repayment plans, then you already know you’ll have your outstanding balance forgiven after 20-25 years. If you take out a Direct Consolidation Loan, however, you’ll reset that clock. So if you already have 10 years of on-time payments and then you consolidate, you’ve just started at zero again. This is true for the Public Service Loan Forgiveness Program as well.
If your loans are privately held, such as by a bank or non-federal source, a Direct Consolidation Loan isn’t available to you. Instead, you’ll want to talk to the bank where your loan is held and see what their refinance options are.
How Do I Know if a Direct Consolidation Loan is Right for Me?
As with anything, research is the key. It’s important to understand which loans you can include in a Direct Consolidation Loan and which ones you’ll want to leave out. You’ll also want to do the math to plot out what your new interest rate will be, and then gauge what your new monthly payments will add up to. Being able to map out the resulting situation before you apply is critical, and will keep you from getting stuck in a worse situation than you’re currently in.
You may find that a Direct Consolidation Loan is a great option for you – and you might just realize that a Direct Consolidation Loan won’t help you as much as you thought it would. Either way, it’s worth looking into if you graduated with federal student loans.