Direct Consolidation Loans: Should I Consolidate My Student Loans?

Are you paying down multiple student loans? Do you ever get confused dealing with so many of them? If you just had one loan payment a month to track, repaying your debt might feel easier. Direct Loan Consolidation is possible if you have federal student loans.

You're probably asking yourself, “Should I consolidate my student loans?” There are pros and cons to consolidation. Here’s a closer look to see if it makes sense for you.

What is Direct Loan Consolidation?

Many borrowers graduate with several federal student loans. This means multiple loan payments after college, which can be hard to track. Direct Loan Consolidation is the process of rolling all those separate loans into one. Your old loans are paid off, and a new loan is created that combines your old loans.

Your new loan will have a fixed interest rate, which is based on the weighted average of the interest rates of the loans you consolidated. There’s no cost to consolidate your federal loans.

What’s the difference between consolidation and refinancing?

People tend to get student loan consolidation confused with student loan refinancing. Although you can technically consolidate loans through refinancing, they’re very different.

Direct Loan Consolidation is combining federal loans into a consolidated federal loan. Direct Consolidation Loans are still eligible for federal protections, like deferment and forbearance.

Refinancing, however, turns your loans into private loans with a private lender, regardless of what type of loan you originally had. If you had federal loans, they’re now private loans, and you lose access to federal protections. Your loans also become ineligible for Public Service Loan Forgiveness (PSLF) and other federal loan forgiveness and repayment options. The tradeoff is generally a lower interest rate on your student loans.

It’s important to understand your student loans fully to determine if you need (or will need) access to federal programs like PSLF. While refinancing can save you thousands of dollars in interest charges, it might not be your best option.

What kinds of loans can be consolidated?

Most federal student loans can be consolidated. This includes:

• Direct Subsidized and Unsubsidized Loans
• Subsidized and Unsubsidized Federal Stafford Loans
• Direct PLUS Loans
• Federal Family Education Loan (FFEL) Program Loans
• Health Education Assistance Loans
• Federal Perkins Loans
• Federal Nursing Loans

Parent PLUS loans can’t be consolidated with other federal loans except other Parent PLUS loans. And private student loans can’t be consolidated to a Direct Consolidation Loan.

How to apply for loan consolidation

Interested borrowers can fill out the Federal Direct Consolidation Loan Application and Promissory Note at StudentLoans.gov. Make sure to have your personal information handy, as well as info on your current federal student loans. You’ll need these details to completely fill out the application.

Through the application process, you’ll indicate what loans you’re consolidating. Then you’ll agree to repay the new Direct Consolidation Loan. You can either apply online or print out and mail in a paper application.

Continue to pay your loan payments with your current loan servicers until your consolidation is approved. When the consolidation is complete, you’ll end up with a single monthly payment.

3 situations when consolidation is a good idea

People consolidate their federal student loans for many reasons — some better than others. When is loan consolidation a good option?

1. You want an income-driven repayment plan or federal loan forgiveness

Not all federal loans qualify for loan forgiveness programs or income-driven repayment (IDR) plans, such as Pay As Your Earn (PAYE). FFEL Loans and Perkins Loans don’t, but they can if you consolidate them into a Direct Consolidation Loan. This is one of the biggest reasons people consolidate their student loan debt.

2. You want to lower your monthly payments

When you consolidate your federal loans, you may be able to extend your loan repayment term to up to 30 years. This would lower your monthly payments since you’re paying over a longer period of time. You may end up paying more money over the life of the loan, though, because the term is stretched out.

3. You want to have one loan payment

Having to keep track of multiple loans can be a chore, especially if they’re with multiple loan servicers. Consolidating federal student loans into one loan with a single monthly payment can help simplify your life.

3 scenarios when loan consolidation isn’t a good idea

If you aren’t pursuing loan forgiveness or don’t need access to an IDR plan, loan consolidation may not be a great option. What else makes consolidating your student loans a bad idea?

1. You’re already on PSLF and have made qualifying payments

To qualify for PSLF, you must make 120 qualifying payments on eligible loans. However, if you consolidate your loans, your repayment count is reset. If you’ve been making payments for a while on this program, consolidation probably isn’t the best idea.

2. If consolidating raises your interest rate

When you consolidate your loans, you’ll receive a new interest rate based on your old rates. It’s possible that you may end up with a slightly higher rate. If you’re trying to pay off your loans early, it makes more sense to leave your loans as is and pay off your higher-interest loans first.

3. If you want to pay off your loans quickly

With consolidation, you can get lower payments because your loan term can be up to 30 years. This is great if your goal is to get lower payments. But it doesn’t help you pay off your loan debt quickly. You can make higher monthly payments to pay them off sooner — but then what was the point of consolidating?

Consolidating your student loans has both advantages and disadvantages. Take time to look over your student loans to determine the right repayment strategy. It’s an important decision to consider.