Although the federal program allows student borrowers to consolidate your loans for simplified payments, this has advantages and disadvantages.
Consolidating multiple loans can be a smart move for some borrowers to stay on top of their payments because it consolidates multiple loans into one loan, simplifying repayment.
Direct loan consolidation allows borrowers to take advantage of different income-based repayment schedules, which may lead to loan forgiveness, depending on the borrower’s repayment and the circumstances.
But unlike some private loan consolidations, direct does not offer lower interest rates through consolidation.
Under the program, a borrower can consolidate subsidized and unsubsidized Stafford Loans, Supplemental Student Loans, Federally Insured Student Loans, PLUS Loans, Direct Loans, Perkins Loans and just about any other type of federal student loan.
Direct consolidation also allows borrowers to retain many of the unique benefits of a federal student loan as well as other consumer protections such as forbearance or deferment, experts say.
Here’s what borrowers need to know about a direct consolidated loan.
1. Direct consolidation adds approximately 0.125% interest. When a borrower consolidates federal student loans in direct form, the government exchanges their previous loans for a single consolidated loan.
The borrower receives a weighted average of interest on previous loans under the consolidated loan, rounded up to one-eighth of 1%.
If the weighted average interest on loans is 5.25%, for example, the new interest rate will be 5.375% after consolidation.
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 at 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”.
But a borrower can calculate the grade point average without an online tool. The new rate can be calculated by multiplying the interest rate with each loan, adding it all up, then dividing by the total loan balance.
3. Term limits may change in the event of consolidation. Unlike most student loans which default to a standard 10-year plan, the terms of 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 old|
|$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 in 180 days, the second consolidation will be added to the first consolidation,” says expert Mark Kantrowitz, editor of Cappex.com, a college and scholarship search site.
Thus, a borrower is not able to do two separate direct consolidations during this period, he says.
5. A direct loan or consolidation is required to enroll in the civil service loan forgiveness. The PSLF eliminates or cancels federal student loans for borrowers employed full-time in eligible public service or nonprofit employment who make 120 qualifying payments on time.
“Only direct loans are eligible for PSLF,” says Nick Demeester, manager of student loan services at GreenPath Financial Wellness.
This includes former federal loans consolidated under the Federal Family Education Loans, known as FFEL, which existed before the direct introduction in 2010. FFEL loans are not eligible for the Civil Service Loan Forgiveness unless they are directly consolidated.
If a borrower reconsolidates a direct loan, it resets the clock on qualified payments toward loan forgiveness, Demeester says. “So if you’re about to do five years of PSLF payments and reconsolidate, then you reset the clock and those payments would start at zero.”
6. Federal student loan borrowers can develop strategies to consolidate loans. “You don’t have to include everything in the consolidation loan,” says Heather Jarvis, attorney and student loan expert.
Applicants using the studentloans.gov The site can deselect loans it doesn’t want included in the app, which automatically imports all federal loans, Jarvis says.
Someone can strategize this way: A borrower with a consolidated FFEL loan, for example, that has a lower interest rate can keep that loan separate and move other federal loans to direct consolidation. But that means two different repayment plans.
7. Consolidation can improve your repayment options. “If you have older federal loans, you may be able to improve your options through direct consolidation,” Jarvis says.
The Department of Education’s income-based Pay As You Earn, or PAYE, program is only available in direct form and to new borrowers who took out loans after October 2007. But older borrowers with Federal student loans, such as those with Stafford loans, may qualify for Revised Pay As You Earn, known as REPAYE, under direct loan consolidation.
8. One of the benefits of consolidation is that it can rehabilitate defaulted loans. According to experts, consolidating defaulted loans can be faster than rehabilitating multiple loans.
“It’s really the impact on the credit report,” says Demeester, who says it can often be faster to rehabilitate one consolidated loan than multiple loans. “Rehabilitation can remove the default status from the credit report. And if they are in default, they risk wage garnishment.”
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