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Many students leave school with multiple student loans – usually eight to 12, depending on the program. Managing so many loans can be overwhelming, but luckily there are strategies that could help simplify your repayment.
For example, if you have federal student loans, you can consolidate them into a direct consolidation loan. This process will leave you with one loan and one payment to follow.
Here’s what you need to know about direct consolidation loans:
What is a Direct Consolidation Loan?
You can consolidate multiple federal student loans into one direct consolidation loan, leaving you with just one monthly payment to follow.
If you’re thinking about consolidating your federal student loans, here are some important things to consider:
- Interest rate: Your interest rate on a direct consolidation loan will be the weighted average of the rates of the loans you wish to consolidate, rounded up to one-eighth of a percent. If some of your loans have high interest rates, you could end up paying a lot more interest.
- Repayment schedule: With a direct consolidation loan, you can extend the repayment term of your loan for up to 30 years, which could significantly reduce your monthly payments. Remember that you will pay more interest over time with a longer term.
- Loan balances: Any unpaid interest on your loans will be added to your principal balance upon consolidation. This means you could end up paying interest on a higher balance than you started with.
Learn more: Consolidation of private student loans
How to Apply for a Direct Consolidation Loan
If you decide to consolidate your federal student loans, follow these four steps:
1. Review your loans
Before you begin the application process, you’ll need to decide which loans you want to include in the consolidation. You can view your federal loans through the National Student Loans Data System (NSLDS).
2. Gather your documents
To complete the application, you will need a Federal Student Aid (FSA) ID. If you don’t have an FSA ID, you can create one at StudentAid.gov — you’ll just need a cell phone number, email address, and your social security number.
3. Complete the application
Once you have gathered your information, you will need to complete the Direct Consolidation Loan Application. Completing the application usually takes about 30 minutes.
4. Manage your payments
It usually takes 30-45 days to complete the consolidation. During this time, be sure to track all of your loan repayments.
Then start making payments on your new direct consolidation loan. You might consider signing up for automatic payment to avoid missing payments in the future – many services offer a rate reduction for borrowers who opt for automatic payments.
To verify: What happens when you fail to repay a student loan
Benefits of a Direct Consolidation Loan
Although consolidating federal loans with a direct consolidation loan may be a good decision for some borrowers, it is not the right choice for everyone.
Here are some potential benefits to consider when evaluating your options:
- Could reduce your payments: With a direct consolidation loan, you can extend your repayment term for up to 30 years. This could lower your monthly payments and reduce the strain on your budget, but remember it also means you’ll pay more interest over time.
- Combine several loans: A direct consolidation loan allows you to combine your federal student loans, which can help simplify repayment.
- Could make you eligible for loan forgiveness: If you have Direct PLUS loans, consolidating them will make you eligible for income-contingent repayment (IDR). It could also qualify you for federal student loan forgiveness programs, such as the Public Service Loan Forgiveness (PSLF).
Learn more: Best Parent Student Loans: Choose Private or PLUS Loans
Disadvantages of a Direct Consolidation Loan
And here are some possible downsides to keep in mind:
- Higher interest costs: If you choose to extend your repayment term with a direct consolidation loan, your overall loan cost will likely increase due to additional interest charges. Also, any unpaid interest will be added to your main balance after consolidation, which means you could end up paying interest on a higher loan amount.
- Will reset the forgiveness timeline: Consolidating your loans resets the clock when it comes to getting approved for programs like PSLF. If you have already made qualifying payments, they will no longer count towards the 10 years of payments required by PSLF.
- Could lose your grace period: Most federal loans have a six-month grace period. If you consolidate your loans before the end of this grace period, you must begin making payments within 60 days of the consolidation being processed.
To verify: How to refinance your student loans
Is it better to refinance or consolidate student loans?
Whether it’s best to refinance privately or consolidate your student loans federally will depend on your personal circumstances and financial goals. Depending on your credit, refinancing a student loan may get you a lower interest rate, which could save you money on interest and potentially help you pay off your loans faster.
If you decide to refinance your student loans, be sure to consider as many lenders as possible to find the right loan for you. Credible makes it easy – you can compare your prequalified rates from multiple lenders in two minutes.
Direct Consolidation Loans: Frequently Asked Questions
Here are the answers to some frequently asked questions about direct consolidation loans:
How long does it take for a direct consolidation loan to pay off old loans?
Once you submit a direct consolidation loan application, it usually takes 30-45 days for it to be processed and your old loans to be paid off. You can usually expect to start making payments on the new direct consolidation loan within two months.
What is the interest rate for a direct consolidation loan?
Your interest rate on a direct consolidation loan will be the weighted average of the rates of the loans you choose to consolidate, rounded to the nearest eighth of 1%.
Can you cancel a direct consolidation loan?
Yes, if your loan consolidation request has not been processed, you can cancel it. To do this, you will need to contact the repairer who received the request.
However, if your application has already been processed and the funds have been disbursed, you will not be able to cancel the new loan.
Keep reading: Student Loan Consolidation vs. Student Loan Refinance