What is a Direct Consolidation loan?
Direct consolidation loans are federal loans that combine two or more federal loans for education into one loan. The fixed interest rate is determined by the average rate of all the loans.
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Understanding a Direct Consolidation loan
Direct consolidation loans are a way for borrowers to reduce the monthly loan payments by combining them into one payment. The U.S. Department of Education facilitates these loans and does not charge borrowers an application fee. Consolidation is possible with most federal loans, but not private loans. Consolidating can be done by borrowers once they have completed school or dropped below half-time student status.
Consolidating a loan can give you access to loan forgiveness programs and additional loan repayment plans. A borrower can cancel their obligation to repay the principal or part of the student loan interest and principal.
Direct Consolidation Loan Process
Direct consolidation loans can be made through the Federal Direct Student Loan Program. Students and parents can borrow directly from the U.S. Department of Education to attend participating schools through the Federal Direct Student Loan Program.
It is important to take into account any benefits that were associated with your original loans before you apply for a direct consolidation loan. Borrowers typically lose these benefits once the loans have been rolled into a new direct consolidation loan. Borrowers may also pay more interest if the new loan has a longer repayment term.
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Advantages and disadvantages of a Direct Consolidation loan
Direct consolidation loans have many advantages. Because the repayment term can be extended to up to 30 year, you may qualify for lower monthly payments. You only need to make one monthly payment. This makes it easier to track your student loan balance.
Direct consolidation loans are fixed-interest loans, so you can get a lower rate. All federal student loans have a fixed interest rate since July 1, 2006. Some loans that were issued before July 1, 2006 had variable interest rates. Consolidation is a way to make a variable rate fixed, which can be a benefit when interest rates rise.
Other repayment options may be available to borrowers. Direct consolidation loans can be repaid with these types of repayment plans:
- A standard repayment plan
- Gradually repayable plan
- A longer repayment plan
- The Income-Contingent Repayment Plan (ICR)
- The Pay As You Earn Repayment Program (PAYE).
- The Revised Pay As You Earn Repayment Plan. (REPAYE).
- A Income-Based Repayment Plan (IBR).
Once loans are consolidated, they can be removed from default status. This may be an option for you if you are in default on any of your loans. However, you will need to meet some requirements. You must first make three consecutive monthly payments on your defaulted loan or agree to repay the direct consolidation loan using one of many repayment options.
Loan forgiveness requirements do not apply to any prior loan payments that were made before consolidation. Consolidating your loans may result in some losses. You may lose interest rates, principal rebates and repayment incentive programs. There are also loan cancellation benefits available for loans you consolidate.
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The pros and cons of direct loan consolidation
- Monthly payments lower
- One monthly payment
- Different repayment options
- Loan forgiveness options available
- Fixed interest rates that are lower than those on previous loans
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Cons of Direct Loan Consolidation
- Over the life of your loan, pay more interest
- No grace period
- Loan forgiveness requirements do not apply to past loan payments
- Consolidating your loans can result in some losses