Direct Consolidation Loan: Everything You Need To Know

direct consolidation loan

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Have you just graduated from college or have been out of school for some time? If so, you may find making your federal student loan payments difficult. A direct consolidation loan can be a good option if you’re in a dire situation. 

But before you proceed, you must understand everything related to a federal direct consolidation loan. 

This guide will explore all the perks you need to know. 

Let’s begin. 

1. Direct Consolidation Loan 2022 Updates 

Depending on the degree, students usually graduate with eight to 12 student loans are common among college graduates. It can be challenging to manage so many debts, but luckily, some methods could make your repayment easier.

For instance, you might combine your federal student debts into a direct consolidation loan if you have any. After this process, you’ll only have one loan and one payment. 

A direct consolidation loan can be used to combine several federal student loans into a single, easier-to-manage monthly payment.

Any unpaid interest will be applied to the main sum when you consolidate your debts. This implies that you can pay interest on a higher balance than when you started.

Remember that consolidation of federal student loans is not an option for private student loans. 

However, other choices, including student debt refinancing, could make it easier for you to repay your private loans.

1.1 What Are Direct Consolidation Loans? 

When you consolidate your student loans, you turn several debts into a single loan. However, you can consolidate all, some, or just one of your federal loans with a direct consolidation loan from the government. 

By combining these loans, you may be able to take advantage of cheaper monthly payments, forgiveness programs, and repayment options. 

Additionally, you only need to make one monthly payment rather than several smaller ones. Also, consolidating your debts is smart to get your student loans back on track.

However, weigh the benefits and drawbacks of a direct consolidation loan before proceeding. For example, you might: 

  • Get lower monthly payments
  • Avoid getting into default
  • Get a fixed interest rate
  • Access several repayment options. 

However, as a downside: 

  • You can pay more interest
  • There’s no grace period
  • Your credit score wouldn’t improve immediately if it’s in default. 

1.2 Who Is Eligible For A Direct Consolidation Loan? 

Anyone can qualify for a federal direct consolidation loan if they have at least one FFEL or Direct loan. And that loan should be in repayment, deferment, grace, or default status. 

Remember that a direct student consolidation loan doesn’t accept loans with an in-school status.

1.3 Advantages Of Direct Consolidation Loan

direct consolidation loan

Reduce Your Monthly Payments

Instead of the typical 10 year repayment period, direct student consolidation loans have a repayment length of up to 30 years. Lowering your monthly payment during this extended repayment period may make your debt more manageable.

Keep Receiving Federal Benefits

Some students might consider refinancing their direct consolidation loans with a private lender to combine multiple loans. But consolidating instead assures you keep government benefits like forbearance and income-driven repayment plans.

A Single Payment Each Month 

You’ll make one monthly payment toward your federal student loans instead of several. In addition, your credit score might improve if this plan helps you prevent late payments.

You Get Access To Repayment Plans 

Certain income-driven repayment plans and PSLF are unavailable to some older student loans, such as Perkins and FFEL loans, unless combined. Access to those programs would be possible by combining those loans into a direct student consolidation loan.

1.4 What Are Some Disadvantages Of Getting A Direct Consolidation Loan? 

You Could Attract More Interest

A direct student consolidation loan will reduce the monthly payment by extending the repayment period. It can extend to 30 years. But throughout your loan, you’ll pay more in interest.

Consolidating your college debts might not be a good idea if you are almost debt-free. 

Also, the rate is calculated based on the average rate of your consolidated loan. So the consolidation loan rate can be higher than it was on some of the loans you had before you consolidated. 

So it can make sense to focus on making payments on your existing debts rather than consolidating them. Of course, if you have one or more direct consolidation loans with much higher interest rates.

Consolidated Loans Can Be Expensive

It may be expensive to consolidate to a longer loan term. However, a longer loan term for your consolidation loan may result in lower monthly payments. 

But it may also result in a higher overall cost of borrowing because you’ll be paying interest for longer.

Your Credit Score Won’t Improve Immediately 

If you were in default, your credit score wouldn’t immediately increase.

If you default, your report would state that your previous loans were in default. However, your debt has been repaid because of a new loan. So consolidating your debt won’t improve your score right away.

However, your credit score will rise if your new, lower monthly payments are affordable and you continue to make your payments on time.

On the other hand, the lender will erase the default from your credit history if you refinance your federal student loans. But late payments are excluded. 

Private Loans Don’t Qualify

Private student loans typically aren’t qualified for direct consolidation loans. So remember, your private student loans won’t be consolidated with your federal ones if you want to make repayment simpler.

When refinancing with a private lender, remember that you can combine private and federal student loans. You might also be eligible for a lower interest rate if you can satisfy the necessary standards for credit and income. 

You can also qualify if you apply with a cosigner who can.

But when federal loans are refinanced, they become private and are no longer eligible for consolidation loans or other government programs.  

As a result, before refinancing any federal student loans, you should be sure that you are aware of the sacrifices you would be making.

1.5 How Long Does It Take To Process A Direct Consolidation Loan? 

direct consolidation loan

To consolidate your federal student loans, you must complete the Direct Consolidation Loan Application and Promissory Note in one sitting. 

If you have all of your personal and financial information ready in advance, the process should take 30 minutes. Your new student loan servicer will contact you after submitting your application to see if any more information is required.

Allow between 30 and 45 business days to get results. Even though this period is the Education Department’s standard, some servicers require up to 75 business days for full processing.

You Must Continue Your Payments

Until your servicer begins the consolidation procedure, you must keep up with your present loan payments. Then, when your new servicer certifies that you’re qualified, you can start making payments on your new loan.

You can have processing delays due to unintentional mistakes besides their usual processing time. 

You might require assistance from a student loan counselor to help you organize your application documents to ensure a smooth procedure.

1.6 Can Direct Consolidation Loans Be Forgiven?

Yes. Student loan forgiveness is one of the most significant available federal benefits. You can still receive federal benefits if you consolidate. 

You can qualify for Public Service Loan Forgiveness. But you must consolidate your debt or take a direct loan to sign up for PSLF. 

You must be employed full-time in an eligible nonprofit or public service position. Also, you must make 120 eligible on-time payments to have your direct consolidation loans forgiven. 

Loans Before Consolidation Can’t Be Forgiven

However, remember this. Any payments you made on the loan before consolidating for loan forgiveness don’t count. 

When you consolidate, it restarts the loan forgiveness programs. So you lose credit for any monthly payments you make toward forgiveness like PSLF and IDR plans.

However, there are some loans that you must consolidate to be eligible for loan forgiveness.

1.7 Which Loans Can You Consolidate? 

A federal direct consolidation loan may only contain federal education loans. Private parent loans and private student loans don’t qualify. Some of the eligible loans include: 

  • Federal Perkins Loans 
  • Parent PLUS Loans
  • Health Professions Student Loans
  • Nursing Student Loans
  • Nurse Faculty Loans
  • Graduate PLUS Loans

A student’s federal Stafford loans can’t be consolidated with their parent’s Parent PLUS loans. But PLUS loans and Stafford loans can be consolidated. In other words, you can get parent PLUS loan consolidation. 

For similar reasons, married borrowers can’t consolidate their loans. Congress initially permitted joint consolidations. 

But they were repealed on July 1, 2006, due to issues that developed when married debtors got a divorce, and the joint consolidation couldn’t be reversed.

You must either agree to repay the consolidation loan under an IDR plan or agree to consolidate the defaulted federal loans. And you can do this by making three consecutive total and on-time monthly payments.

So if you have PLUS loans, you can check out parent PLUS loan consolidation. 

2. Federal Direct Consolidation Loan

By consolidating their monthly loan payments into one, a federal direct consolidation loan helps reduce the number of payments you must make each month.

There is no application cost for these loans, which the U.S. Education Department facilitates.

Private loans can’t be consolidated, but most federal loans may. Once students graduate from high school, leave school, or drop below half-time status, borrowers can consolidate.

2.1 What Is A Federal Direct Consolidation Loan? 

As explained earlier, the direct student consolidation loan helps you combine one or more of your federal loans into a new loan. 

But can you reconsolidate your student loans? It’s possible, but the conditions make it very limited. 

2.2 Does Federal Loan Consolidation Hurt Your Credit? 

direct consolidation loan

Consolidating your debt can occasionally result in a credit improvement. But it can also have the opposite effect—at least initially. Your direct consolidation loan servicer will conduct a “hard pull” on your credit record because debt consolidation calls for a new loan. 

They can evaluate your creditworthiness using this powerful pull. But it can temporarily lower your credit score.

The good news is that any short-term drop in your credit score brought on by a strict inquiry will pass quickly. Negative effects often only persist for a few months. 

The advantages of combining student debts typically exceed the drawbacks. But think about your situation and balance the benefits and drawbacks before choosing.

3. Federal And Private Student Consolidation: What’s The Difference? 

It’s crucial to distinguish between federal and private consolidation loans. You’ll use a consolidation loan to combine your debt with federal loan consolidation.

You can combine most federal student loans with these loans to create a new loan with reduced monthly payments. Usually, extending the repayment period leads to a cheaper monthly payment. 

As a result, you’ll make lower monthly payments toward your loan total but for a longer period than usual.

3.1 Private Student Loan Consolidation 

Because you have various private student loan lenders, private student loan consolidation operates differently. 

Extending the repayment period can reduce your monthly payment, get a lower interest rate, and save money on interest when you take out direct consolidation loan. 

However, consolidating or refinancing your student loans with a private lender can forfeit special loan perks. 

Before you take this path, consider the advantages and disadvantages and ensure the gains surpass any sacrificed benefits or protections.

3.2 What Credit Score Is Required For Refinancing? 

Different eligibility criteria apply to credit unions, online lenders, and banks when refinancing. To qualify with the most respectable lenders, you typically need a credit score of at least 650.

You would also have access to lenders’ lowest advertised rates if your credit score were in the 700s or higher. 

If your credit score isn’t high enough, you might be able to find a cosigner who meets the requirements of your desired lender.

3.3 When Should You Refinance Your Student Loans?

Your particular circumstances will determine the ideal time to refinance student loans. 

For example, you should immediately consider refinancing if you have private loans with a high-interest rate and a good credit score.

However, considering the potential drawbacks, refinancing might not be the best option if you have federal student loans.

3.4 Downsides Of Refinancing 

Refinancing your student loans is cheap and comparatively simple. But there are possible drawbacks, especially if your family’s finances aren’t stable.

If you refinance federal direct consolidation loans, you might save money or worry. But you’d have to give up the protections only available through the government, such as loan forgiveness programs and IDR plans.

Before putting your name on the dotted line, make sure that refinancing your federal or private loans is the appropriate choice.

3.5 Should You Consolidate Or Refinance Your Loans? 

Your unique situation and financial goals will determine whether it’s better to combine your loans through the federal government or privately. 

Refinancing your student loans may result in a cheaper interest rate depending on your credit. And that can help you save money and possibly accelerate your debt repayment.

Consider as many lenders as possible if you decide to refinance your student loans to discover the best loan for you. 

4. Debt Consolidation Loans Bad Credit Direct Lender

direct consolidation loan

If you’re asking, “what should I do about the debt consolidation loans bad credit direct lender,” this section will help you. 

If you have a bad credit score, you’ll most likely get turned down by your bank. But with numerous lenders available, you can consolidate your loans even with a low credit score. 

Lenders will consider your current financial situation when you apply for a direct consolidation loan with bad credit. Not only that, but they’ll check other factors to determine whether you can afford the fixed monthly repayments. 

You can check your eligibility with some lenders without affecting your credit score. That will help you know if you’ll get turned down or not. 

If you’re worried about a debt consolidation loans bad credit direct lender, you can consider cosigning. 

4.1 Does Consolidating Your Debt Give You Bad Credit?

While direct consolidation loan can result in cheaper monthly payments, it can also temporarily damage your credit score. 

Every credit application typically results in a hard inquiry, temporarily dropping your credit score by a few points. 

But you can get good credit if you make your payments on time and stop the bad habits that caused your debt to accumulate. 

4.2 What Is The Minimum Credit Score For A Debt Consolidation Loan? 

Loan lenders mostly use your credit score while making lending decisions. In general, lenders will charge you higher interest rates for borrowing the lower your credit score is. 

You must qualify the minimum requirements the loan lender sets loan consolidation loan. 

Some loan lenders for people with bad credit might accept scores as low as 580, typically in the mid-600 range.

4.3 How To Choose The Best Loan Lender

Getting a debt consolidation loan that works with your spending plan and aids in your effort to pay off your debt is crucial. Many lenders will prequalify you without conducting a hard inquiry into your credit. 

By prequalifying, you can indicate the loan size, interest rate, and loan duration for which you might be eligible.

Then, using those, you can evaluate choices and select the best one for you based on the following criteria:

Annual Percentage Rate

Your credit score and other financial considerations play a role in determining your APR. This additional sum is charged on top of your principal each month.

Loan Lender Features

Look for features like hardship programs, credit monitoring, direct payments to your old creditors from the new lender, and other customer service programs.

Student Loan Cost

When you shop, compare the entire cost of each loan, including origination fees and other costs. A sizable amount of costs could outweigh the advantages of a low APR.

5. Direct Consolidation Loan Interest Rate 

The interest rate on your consolidation loan will be the rounded-up weighted average of the interest rates on the loans you want to consolidate. 

You can end yourself paying a lot more in interest if several of your loans have high-interest rates.

5.1 What Is The Current Direct Consolidation Loan Interest Rate? 

Interest rates for federal consolidation loans are fixed. The maximum interest rate for a consolidation loan was 8.25% through June 30, 2013. There is a cap on interest rates on new federal consolidation loans made on or after July 1, 2013.

Direct consolidation loans might be used to fix the current rate on federal loans while their interest rates were changeable. Therefore, the interest rate for a federal consolidation loan was determined based on the current interest rates for the combined loans. 

The lower interest rates during the grace or in-school periods encouraged borrowers to consolidate their debt. 

For instance, in May 2005, borrowers could lock in rates on Direct Subsidized and Unsubsidized Loans as low as 2.875%. And this was for the in-school or grace periods. 

Borrowers’ interest rates could be lowered to as low as 2.625% with a 0.25 percent discount for auto-debit.

6. Direct Consolidation Loan Application 

direct consolidation loan

Here are the four steps if you want to consolidate your federal loans: 

6.1 Review Your Federal Student Loans 

You must choose which loans to include in the consolidation before beginning the application procedure. You can use The National Student Loan Data System to check your federal loans.

6.2 Get All The Necessary Documents

You will require an FSA ID to complete the application. You can create an FSA ID at if you don’t already have one. All you need is an email address, a mobile phone number, and your Social Security number.

6.3 Complete The Application 

You must complete the direct consolidation loan application after gathering your data. The average time to complete the application is 30 minutes.

6.4 Manage Your Monthly Payments

The consolidation typically takes 30 to 45 days to be finished. Make sure to make all of your loan payments throughout this time.

Following that, start repaying your new consolidation loan. Finally, consider enrolling in autopay to ensure you never miss a payment again. 

Many loan servicers give rate discounts to borrowers who choose this option.

Remember: federal loans can’t be consolidated while you are enrolled in school at least half-time. You must graduate, drop below half-time enrollment, or quit school to be eligible.

7. When Should You Consolidate Your Loans?

Your direct consolidation loan must be in the repayment term, or at the very least the grace period, to be eligible for a consolidation loan. For example, this might happen due to finishing school, leaving early, or enrolling only partially. 

You can’t consolidate your student debts while you are still in school.

When making your choice, you need also consider a few additional factors. You should consider consolidating your student loans if you want to make a single payment instead of several.

Consolidating your debt is a smart move if paying all of your monthly bills is now too difficult. Additionally, if you wish to be eligible for federal assistance, think about consolidating.

These include perks, including repayment schedules based on income and even loan forgiveness. 

Certain loans, such as the Parent PLUS Loan or a Perkins Loan, must be combined to receive those benefits.

7.1 You Can Cancel Your Loans 

You can cancel your loan consolidation application if it hasn’t yet been processed. However, you must contact the servicer that processed the application to do this.

You won’t be able to cancel the new loan. However, if your application has already been reviewed and the money has already been dispersed.

8. 4 Reasons To Consolidate Your Loans

8.1 Make Your Life Easy With One Payment 

Consolidation may make sense if you’re tired of managing many loan payments simultaneously. Once you combine, you’ll just have one monthly loan payment to remember to make.

8.2 Reduced Monthly Payment 

Consolidating your loans can help if your present loans have excessively high monthly payments. Most of the time, extending your repayment period will allow you to reduce your monthly payment for your direct consolidation loan. 

However, remember that even if your interest rate is lower, you can pay more interest the longer you prolong your loans.

8.3 You Want To Pay Off Your Debt Quickly

Even if consolidation doesn’t ensure early repayment, it can simplify things. 

Concentrating on repayment and finding extra money to contribute toward your monthly loan principle might help. Especially if you only have one monthly payment to worry about. 

If you receive a lower interest rate, you might be able to pay off your debts even more quickly.

8.4 A Private Lender With Lower Interest Rate 

You can get lower rates if you decide to refinance your direct consolidation loan. You might save money by obtaining a new loan with a lower interest rate if your loans have high-interest rates. 

But you’ll have to do a lot of research to find a lower-priced lender. After that, you can seek help if you need it. 

9. Conclusion

A federal direct consolidation loan can help you restructure your student debt to make them simpler to repay. But you might not end up saving money in the long run. There is no interest rate reduction. 

So the direct loan consolidation program is not intended to reduce your interest payments like other forms of consolidation loans. 

Instead, it’s intended to make your federal loan payments simpler.

If your credit is good, refinancing your federal and private loans with a private lender may help you to get a better interest rate. 

Just be aware that if federal student loans are refinanced with a private loan, they will no longer be eligible for government benefits. And if you have PLUS loans, check if you qualify for parent PLUS direct consolidation loan. 


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