If you are in debt to the federal student loans, you can consider combining either one or more into a direct consolidation loan. The U.S. Department of Education offers direct consolidation loans, which can lengthen your loan terms and simplify repayment. Federal loan consolidation is different from student loan refinancing, even though both can combine multiple debts into one.
Your interest rate will not go down if you consolidate your federal loans, but your student debt will remain part of the federal loan program. However, refinancing federal loans through a private lender substitutes a private loan for federal protections and repayment plans. Furthermore, there’s an understanding of what federal direct loan consolidation is, associated with its benefits, drawbacks, and application process.
What is a Direct Consolidation Loan
A direct consolidation loan is a kind of loan that merges multiple federal education loans into a single loan. Additionally, the weighted average of the rates on the aggregated loans serves as the basis for the fixed interest rate on this loan. The borrower must complete a free application to combine debt through the direct consolidation loan scheme.
How Does Direct Consolidation Loan Work
If you are in debt to federal student loans, you can consider combining multiple of these loans into a single loan known as a direct consolidation loan. In addition, you can select different terms for repayment after consolidating. However, you may choose a regular plan with terms as long as 30 years or an income-driven repayment (IDR) plan, depending on the amount of your loan.
The weighted average of your prior rates, rounded to the closest one-eighth of one percent, will be your new interest rate. You will also have the option of selecting a different loan servicer. However, consolidating several student loans into a single loan with only one monthly payment simplifies repayment. You are not forced to consolidate all of your federal debts.
Types of Consolidation Loans
Consolidation of Direct Loans is only available for federal student loans. Loans from private schools are not accepted. You can combine the following loan types:
- Direct subsidized and unsubsidized loans.
- Direct PLUS loans.
- FFEL subsidized and unsubsidized loans.
- FFEL PLUS loans.
- Federal Perkins loans.
- Nursing student loans.
- Nurse faculty loans.
- Health education assistance loans.
- Health professions student loans.
- Underprivileged student loans.
- FFEL and direct loans consolidation loans (with some restrictions).
It should be noted that federal parent loans can be consolidated, but not with student loans that they obtained.
Advantages of Direct Consolidation Loans
Borrowers may have the option of repaying for up to 30 years with a single monthly payment. This makes it easier to track the balance of your student loans. Furthermore, direct consolidation loans feature a fixed interest rate and provide borrowers with a range of repayment options.
Among the options are:
- A regular repayment plan.
- A payback schedule that is divided into phases.
- A longer payback period.
- SAVE stands for “Save on a Valuable Education.”
- The PAYE Plan.
- An IBR Plan (Income-Based Repayment).
- A strategy for income-dependent repayment.
- A repayment schedule based on income.
Disadvantages of Direct Consolidation Loans
The interest rate on a combined loan is calculated by averaging the rates on the separate loans and rounding the findings to the closest one-eighth of a percent (0.125%). The interest rate on a consolidated loan may be significantly higher or lower than the average of the loans.
Consolidation lowers the borrower’s monthly payment by increasing the repayment period, but it may result in higher overall payments. Additionally, a direct consolidation loan has no grace period. Following consolidation, the repayment period begins immediately, with the first payment being due in around 60 days.
How to Apply For Direct Consolidation Loans
You have two options for applying: online or through US mail. The majority of users finish the online application within 30 minutes. To apply by mail, click on the previously stated page and choose “Don’t want to use the electronic application?” Once your application is received, a loan servicer will handle the debt consolidation process.
At this stage of the process, you can contact this service with any inquiries you may have regarding your consolidation application. Moreover, this service might not be the same as the one you selected for your consolidation application. If so, you can continue working with the servicer of your choice after the consolidation is over, so don’t worry.
Final Thoughts
One option for those who have to manage several payments on different federal student loans is to apply for a direct consolidation loan. Under this agreement, the loans are merged into a single loan with a fixed interest rate. Borrowers are not required to undergo a credit check or pay an application fee. Furthermore, the information can be obtained on the Department of Education website.