You can’t rely on Nicki Minaj to pay off your student loan. But there is an easier way to repay your student loan obligations through a Direct Consolidation Loan. An option available for federal student loans only, this type of loan offers simplification and unlocks the door to student loan forgiveness. Learn more about its perks and the practical considerations backing any decision to consolidate.
The Direct Consolidation Loan
Generally speaking, consolidating loans is like refinancing: you take out a new loan to pay off your current loans and focus on paying this consolidated loan instead.
Almost all federal student loans are eligible for consolidation. This includes Stafford Loans (subsidized and unsubsidized), PLUS Loans, and Perkins Loans. Most importantly, you can enroll federal student loans in default for consolidation.
It’s however possible to not consolidate all your federal student loans by leaving out those with lower interest rates.
Why Consolidate Your Federal Student Loans
Consolidation is all about simplifying the process of repaying federal student loans – by combining multiple loans with varying repayment lengths and amounts into a single loan with a single monthly payment and term and one loan servicer. With a longer repayment term, you’d have lower monthly payments. And those with loans before 2006 can convert their variable loans into fixed loans.
Arguably the most important feature of a Direct Consolidation Loan is its inclusion of defaulted federal loans for consolidation. It can help you get out of default status and thus deter collection efforts like wage garnishment and a negative mark on your credit report.
Federal student loans have a variety of repayment options, with some of them leading to student loan forgiveness. And while some of these loans don’t have to be consolidated to be eligible for forgiveness, loans such as Federal Family Education Loans (FFEL) need to be consolidated under a direct to qualify for Public Service Loan Forgiveness.
PSLF forgives the federal student debt of borrowers with full-time employment in an eligible nonprofit or public service post and have made 120 qualifying monthly payments on their loans.
Why Think Your Student Loan Consolidation Over
For all its perks, a Direct Consolidation Loan is an important decision you need to mull over. Consider the following:
- Interest rate. When you take out a direct, expect to pay a higher interest. A 0.125% in interest is added to the generally weighted interest rate of all existing loans.
- Payoff. If you are near paying off your loans, it might be wiser to just carry on with the scheduled loan terms. Consolidating resets the term so you inevitably pay more in interest costs throughout the life of the loan.
- Term. A Direct Consolidation Loan can be repaid between 10 and 30 years, depending on the total federal loan balance. There is a higher risk of nonpayment on longer-term loans.
- Seasoning period. You can only consolidate once in every 180 days. If you attempt to make two consolidations within that period, the second gets added to the first consolidated loan.
- Benefits. Each federal student loan has its unique benefits and protections that will be lost when combined with other federal loans. One important loss pertains to credits you’ve gained when you made eligible payments under income-driven plans or PLSF for your existing loans.