If you're repaying several federal student education loans, checking up on multiple payments could be a headache, and forgetting to make a payment can lead to additional fees along with a credit hit.
Consolidating federal student education loans having a direct consolidation loan is a method to simplify payments by combining many loans into one loan. The loan consolidation program offered by the U.S. Department of Education is free and could be a good option if you'd prefer to handle one loan instead of many.
How Direct Debt consolidation Works
Direct loan consolidation allows borrowers to take out a brand new federal loan to pay off existing federal education loan balances. This consolidation process turns many student education loans into one with a single payment, that make it simpler to manage payments and may even lower your payment per month.
Loans for loan consolidations can move up to 30 years with respect to the repayment schedule you choose, and the interest rate in your new loan will be the weighted average from the loans you consolidate, rounded up towards the nearest one-eighth of 1%.
Most federal loans entitled to the direct debt consolidation. Here is a breakdown of loans that you could consolidate:
- Direct subsidized and unsubsidized loans
- Subsidized and unsubsidized federal Stafford loans
- Direct PLUS loans
- PLUS loans in the Federal Family Education Loans (FFEL) program
- Supplemental Loans for Students (SLS)
- Federal Perkins loans
- Federal nursing loans
- Health education assistance loans
For those who have loans in default, they might also qualify for consolidation so long as you satisfy 1 of 2 conditions: You have to either make three consecutive on-time payments around the defaulted loans or agree to sign up for an income-driven repayment schedule using the new consolidation loan.
6 Steps for Consolidating Has given
Borrowers can apply for a student debt consolidation online or by mail. Here is a step-by-step summary of the procedure:
- Get your loan documents together. Put together your loan statements and bills to determine which loans you want to consolidate.
- Start the internet or paper application. The beginning section of the application asks for information including your name, address, Ssn and make contact with number.
- Choose the loans you want to consolidate. Choose which loans to include and exclude in the new consolidation loan. You can also note loans that are currently in a grace period, and the loan servicer will delay the consolidation until that period has ended.
- Select your repayment plan. Borrowers can decide on income-driven repayment plans. The conventional repayment plan, graduated repayment schedule and extended repayment plan are also options that offer terms of 10 to 30 years.
- Wait for loans to become repaid. After applying, the loan servicer will handle the rest. Be sure to keep up with payments in your existing loans until funds from the new loan are disbursed to pay off that old balances.
- Make payments around the new loan. Once the consolidation is finished, the first payment on your loan consolidation will be due within Two months from the loan disbursement.
Pros and Cons of a Direct Loan Consolidation
Before deciding to get a direct debt consolidation, you need to consider the benefits along with the drawbacks. While there are perks to consolidating student education loans, there are some disadvantages to think about, particularly if you're a borrower who's already made payments toward income-driven repayment loan forgiveness.
Pros:
- Multiple payments become one payment. Having fewer loan repayments to keep up with each month can minimize the risk of accidentally missing one.
- Consolidating may decrease your monthly payment. Choosing a consolidation loan having a longer loan term can help you secure a lesser monthly payment. This might free up some room inside your budget if payments are causing financial strain.
- Consolidating could possibly get loans from default. Consolidating is a way to get loans back in good standing so that you can qualify for payment relief if you are experiencing financial hardship. Putting loans in forbearance or deferment isn't possible whenever your loans are in default—but consolidated loans become entitled to these benefits again if you satisfy the conditions explained above.
Cons:
- Consolidating could erase payments toward loan forgiveness. The loan can be forgiven after paying for 25 to 25 years under an income-driven repayment schedule. If you consolidate your loans, however, progress toward this forgiveness is erased, and you've got to start from scratch. This is typically true for Public Service Loan Forgiveness as well, but under the COVID-19 relief plan, on-time payments you are making on federal loans before consolidating still count toward forgiveness for a limited time.
- Consolidating to a longer loan term can be costly. Choosing a longer loan term for your loan consolidation could lower your monthly obligations, but it could also boost the total cost of your loan over time since you'll be paying interest for a longer period.
- Consolidating could increase your rate of interest. Rate discounts or deals you're currently getting won't go over to your new consolidation loan.
- Unpaid interest gets added to balance. If you went through a time of deferment or forbearance and you didn't pay interest, that interest may be capitalized and added to your new loan's principal. Interest put into a high loan balance can be costly.
The Bottom Line
Consolidating student loans is a method to restructure your federal loans to make them easier to repay, but it might not help you save money long term. The direct debt consolidation program is designed to simplify payments for federal loan borrowers and never to save yourself on interest—just like other types of consolidation loans—since there is no interest rate reduction.
If you have strong credit, refinancing student loans with a private lender could help you secure a lesser interest rate and long-term savings on federal and student education loans. Just remember that using a private loan to refinance federal student education loans means they'll no more qualify for federal perks, like deferment, forgiveness and income-driven repayment plans.
The best way to manage your loans comes down to your money, goals and credit score. Understanding the terms, rates and repayment relation to each option will help you develop the very best technique for tackling your financial troubles.