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How the federal Direct Consolidation Loan works
When and how to consolidate your federal student loans with the government.
If you’re juggling multiple federal loan repayments or aren’t eligible for a flexible repayment plan, you might want to consider taking out a Direct Consolidation Loan. It can simplify your repayments and open you up to more perks. But it might make your loans cost more in the end.
How does the federal Direct Consolidation Loan work?
A federal Direct Consolidation Loan works by combining all of your federal student loans into one. You get one rate, one monthly repayment, one loan term and one balance to keep track of. It’s a type of federal Direct Loan, meaning it’s eligible for most repayment plans.
Only have one loan? You can still consolidate it as long as you meet the requirements. While your rate might increase, it could be a good way to open yourself up to longer terms, more flexible repayment plans or forgiveness programs.
What’s the interest rate?
Direct Consolidation Loans come with a fixed rate that’s a weighted average of your current student loans, rounded up to the nearest 0.125%. Here’s how to calculate your rate if you choose to consolidate your federal loans:
- Multiply each federal loan balance by its interest rate. This gives you what’s called the weight factor.
$10,000 x 4.7% = 470
$5,000 x 6% = 300
- Add your weight factors together to get your total weight factor.
470 + 300 = 770
- Add your loan balances together to get the total loan amount.
$10,000 + $5,000 = $15,000
- Divide the total weight factor by the total loan amount.
770/15,000 = 0.0513
- Multiple the result by 100.
0.0513 x 100 = 5.13
- Round it up to the nearest 0.125% to get your Direct Consolidation Loan rate.
Direct Consolidation Loan rate: 5.25%
Does it cost anything to consolidate?
No. Consolidating your federal loans is free — there’s no application or origination fee. Some private companies offer to help you with your application for a fee. However, the Department of Education warns that this is unnecessary, since you can quickly apply online by yourself.
Am I eligible for a Direct Consolidation Loan?
To qualify for a Direct Consolidation Loan, you must:
- Have at least one eligible federal loan.
- Be in the repayment or grace period.
Which loans can I consolidate?
You can use a Direct Consolidation Loan to consolidate most federal loans. These include:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- Subsidized Stafford Loans
- Unsubsidized Stafford Loans
- FFEL PLUS Loans
- Supplemental Loans for Students
- Perkins Loans
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
A Direct Consolidation Loan might also be eligible for consolidation as long as you include another federal loan with it. FFEL Consolidation Loans might be eligible for consolidation on their own.
However, you can’t consolidate Parent PLUS Loans with loans taken out in your child’s name, and all private loans are ineligible.
Can I get a Direct Consolidation Loan with bad credit?
You can. The Department of Education doesn’t run a credit check when you consolidate your federal loans, so it’s open to all credit types.
However, you might have some trouble consolidating a loan that you’ve already defaulted on. In that case, you must either make three monthly repayments in a row before you consolidate or agree to pay it off based on an income-driven repayment plan.
If you’ve received a court order to pay back your loan or you’re having your wages garnished, you’ll have to have those legal orders lifted before you can consolidate.
Can I benefit from consolidating my federal loans?
You might want to consider consolidation if you want to:
- Cut down on the number of monthly repayments. Consolidating your loans moves them all to one neat balance with one repayment each month.
- Lower your monthly repayment. Direct Consolidation Loans come with terms as long as 30 years, which can significantly lower how much you pay each month.
- Qualify for an income-driven repayment plan. Since they’re part of the Direct Loan program, these loans are eligible for repayments based on how much you earn each month.
- Apply for Public Service Loan Forgiveness (PSLF). You need to be on an income-driven repayment plan to be eligible for PSLF.
- Switch to a fixed interest rate. This means you don’t have to worry about your interest rate increasing and can get more consistent repayments than you would with a variable-rate loan.
Applying for forgiveness? Consolidate carefully
If you’re paying off Direct Loans with the intention of applying for PSLF, think twice about consolidation.
Here’s why: PSLF requires you to make 120 repayments while working at a qualifying job to be eligible. If you consolidate, any eligible repayments you’ve already made no longer count toward PSLF. If you’ve already started paying off your loan and work a public service job, consider only consolidating loans outside of the Direct Loan program instead.
When to hold off on consolidation
A Direct Consolidation Loan isn’t right for everyone. You might want to reconsider consolidating if:
- You’re eligible for Perkins Loan cancellation. Consolidating your loans involves totally paying off your current ones and replacing them with a Direct Loan, meaning you’d no longer have a Perkins Loan to cancel.
- You can afford standard monthly repayments. You won’t be able to benefit from an income-based repayment plan and you’ll end up paying a higher rate over a longer term, increasing the overall cost of your student debt.
- You want to combine parent and student loans. A Direct Consolidation Loan is only available to parents and students separately — you can’t use it to refinance a parent loan in your child’s name.
- You want to keep a variable rate. A variable-rate loan has the potential to go higher or lower than a fixed-rate loan. If you’re willing to take that chance, stay away from consolidation.
How can I apply for a Direct Consolidation Loan?
You can apply for a Direct Consolidation Loan online through StudentLoans.gov or by downloading and printing a paper application. The application typically takes about 30 minutes to complete, though you might want to follow our step-by-step guide to get an idea of what to expect.
Before you get started, make sure you have a recent statement for each loan you’d like to consolidate on hand. Once you submit your application, your servicer should reach out to you with your payoff balance for each and a deadline to cancel or change your Direct Consolidation Loan application.
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Consolidating your federal loans can simplify repayments and make you eligible for more flexible repayment plans and forgiveness programs. But you could end up paying a higher rate over a longer period of time, making your loan more expensive than it originally was.
To learn more about how they work, read our guide to student loans.
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