While the federal program allows student borrowers to consolidate their loans for streamlined payments, it has advantages and disadvantages.
Consolidating multiple loans can be a smart move for some borrowers to keep their payments under control, as it consolidates multiple loans into one loan, making repayment easier.
Direct loan consolidation allows borrowers to take advantage of different income-based repayment programs, which can lead to loan forgiveness, depending on the repayment and the borrower’s 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 anything else. 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 deferral, experts say.
Here’s what borrowers need to know about a Consolidated Direct Loan.
1. Direct consolidation adds approximately 0.125% interest. When a borrower consolidates federal student loans online, the government swaps their past loans for a single consolidated loan.
The borrower receives a weighted average interest on past loans under the consolidated loan, rounded to eighth of 1 percent.
If the weighted average loan interest 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 direct online request, the studentloans.gov website will also calculate the interest rate before the borrower clicks “submit”.
But a borrower can calculate the weighted average without any tool online. The new rate can be calculated by multiplying the interest rate for each loan, adding all of that, and then dividing by the total loan balances.
3. The duration limits may change in the event of consolidation. Unlike most student loans which do not conform to a standard 10-year plan, terms for a consolidated loan vary from seven to 30 years, depending on the balance and the repayment schedule.
Total Federal Loan Balance
Repayment terms of the direct consolidation loan
|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 within 180 days, the second consolidation will be added to the first consolidation,” says expert Mark Kantrowitz, editor of Cappex.com, a university and scholarship research site.
Thus, a borrower is not able to perform 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 program. The PSLF eliminates or cancels federal student loans for borrowers employed full-time in a qualifying public service or non-profit job 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 the former Federal Consolidated Loans under Federal Family Education Loans, known as FFEL, which existed before the introduction of Direct in 2010. FFEL loans are not eligible for Public Service Loan Forgiveness at unless they are consolidated directly.
If a borrower reconsolidates a direct loan, it resets the clock from qualified payments toward loan cancellation, Demeester says. “So if you’re going to make 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 establish a strategy for consolidating loans. “You don’t have to wrap it all up in the consolidation loan,” says Heather Jarvis, lawyer and student loan expert.
Applicants using the studentloans.gov site can deselect loans they do not want included in the application, which automatically imports all federal loans, Jarvis says.
Someone can strategize this way: A borrower with a FFEL consolidated loan, for example, who 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 explains.
The Department of Education’s income-focused Pay As You Earn program, or PAYE, is only available to direct borrowers and new borrowers who took out loans after October 2007. for Revised Pay As You Earn, known under the name of REIMBURSEMENT, as part of the grouping of direct loans.
8. One of the advantages of consolidation is that it can rehabilitate defaulted loans. According to experts, consolidating defaulted loans can be faster than rehabilitating multiple loans.
“That’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. “Pardon can remove the default status from the credit report. And if they are in default, they risk a wage garnishment.”
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