Written By Lindsay Van Someren
One of the least fun things about graduating is opening your first student loan statement. If you’re like most people, you might be surprised by the number of loans you have — and how much student loan debt you have to pay back each month for each individual loan. If you’re really unlucky, you may even have multiple loan servicers for your loans to boot.
One solution is a Direct Consolidation Loan. This wraps up all of your current federal student loans into one loan. Instead of worrying about herding a bunch of cats, you can combine them into one big cat that’s easier to manage.
There are definite pros and cons to consolidating your loans. For example, if you’re trying to get student loan forgiveness, consolidating your loans can throw a big wrench in those plans. But it can also greatly simplify things if you’re struggling to manage each loan.
Here’s everything you need to know about Direct Consolidation Loans so you can make an informed decision about what’s best for you.
What is a Direct Consolidation Loan?
As you go through college, taking out multiple loans each year is pretty common. By the time you graduate, you may have a handful of loans, possibly even some with different servicers. This can make handling each of your loans difficult.
A Direct Consolidation Loan rolls all of your current federal student loans into one, single loan with one servicer.
Not all loans are eligible. For example, you can’t consolidate Parent PLUS loans with your own loans, although most other federal student loan types are eligible, including Grad PLUS loans. You also can’t include private student loans in a Direct Consolidation Loan.
If you have private student loans, you have two options. You can either keep them separate from your federal student loans or refinance your federal and private loans together with a single private lender.
Be careful with refinancing federal loans, however. There are situations when it might make sense, but you’ll also lose out on federal loan protections that private student loans don’t provide, such as handy income-driven repayment (IDR) plans and student loan forgiveness.
5 reasons to consolidate your federal student loans
It can be frustrating to decipher whether a Direct Consolidation Loan is right for you. Here are some common situations that cause people to spring for student loan consolidation.
1. You want all of your federal student loans to qualify for income-driven repayment plans
Income-driven repayment plans, which include Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn and Revised Pay As You Earn, can be a godsend for people struggling to make their student loan payments on a low salary — like right after you graduate. These programs allow your student loan payments to scale down to match your income, so you can afford to pay for other things, like rent and food.
But here’s the thing: not all loans qualify for IDR plans. Direct loans and Grad PLUS loans always qualify for income-driven repayment. But if you have Stafford Loans from the Federal Family Education Loan Program (FFEL) or Perkins Loans, for example, you might be out of luck — unless you consolidate these loans into a Direct Consolidation Loan.
2. You want all of your loans to be eligible for loan for PSLF
Public Service Loan Forgiveness (PSLF) offers a huge opportunity to folks working in the public sector. But again, not all loans are eligible.
Direct loans qualify. But FFEL or Perkins Loans aren’t eligible unless you first consolidate these loans in with a Direct Consolidation Loan. Only then will you be able to get PSLF for these specific loan types.
3. You want lower monthly payments
When consolidating your federal student loans, you may be given the option to extend your loan term length as far as 30 years. Since everyone graduates with a standard 10-year repayment plan, this means that your payments may become much, much lower because they’re spread out across a longer time frame.
Of course, the flipside of this is that you'll be paying more in interest over the long term. But if you need help lowering your payments, this is one way to do it outside of income-driven repayment.
4. You want to choose your own loan servicer
One of the lesser-known benefits of consolidating your loans is that you get to choose your own loan servicer from a list of options. If you’ve been having problems with your current loan servicer (such as FedLoan), this is your one and only opportunity to switch servicers. Read our other servicer reviews to learn more:
When you’re first assigned your federal student loan servicer, chances are you didn’t have a say in which one you got to work with. Now’s your chance to be more selective if you’ve had a bad experience.
5. You want to manage one payment schedule
As we mentioned above, one of the biggest advantages of student loan consolidation is simplifying your loan repayment schedule.
If you have multiple loans with one servicer, chances are they’ll roll all of your monthly payments into one payment anyway, especially if you sign up for autopay. For example, if you have two loans with a monthly payment of $150 each, the servicer will simply debit $300 from your account each month.
But if you still crave the simplicity of one loan, or if you have multiple loan servicers (who must be paid separately), consolidating your loans is a useful option.
5 reasons a Direct Consolidation Loan might not make sense
The truth is there are many reasons to consolidate your student loans. But that’s not a universal truth for everyone. Depending on your situation, there are some cases when you should avoid it.
1. You don’t want to be in debt longer
Most people end up with a longer term length after consolidating their loans. The term length on a Direct Consolidation Loan can be as long as 30 years.
Even if you consolidate your loans right after graduating, that means you could be in debt for 20 years longer than expected, compared to a 10-year Standard Repayment Plan.
This is both a pro and a con. It might lower your monthly payment, but it also means you’ll be paying a lot more in interest over time because you’re extending your repayment term. But you also have the option of paying off your loans sooner. No one says you have to be in debt for that long.
2. You’re trying to get Perkins Loan cancellation
If you have Perkins Loans and you work in certain fields, such as firefighting, teaching or law enforcement, you may qualify for complete cancellation of your Perkins Loans in as little as five years, if you meet the other requirements.
If you consolidate your Perkins Loans into Direct Consolidation Loans, however, you won’t be eligible for Perkins Loan cancellation anymore.
3. You want to pay off your most expensive debt first
When consolidating your student loans, your new interest rate is the average of all of the individual loans combined, rounded up to the nearest eighth of a percent. So, for example, if you have two loans — one at 3% APR and one at 5% APR, your new rate will be 4.125% APR.
One of the best ways to pay off your debt as fast as possible and save the most money is by paying off your most expensive loans first (i.e., the ones with the highest interest rate). This is known as the “debt avalanche” method.
But if you consolidate your loans, you won’t get that opportunity.
4. You want to refinance for a better interest rate
Consolidating your student loans doesn’t give you an interest rate advantage. But one way you might get a lower interest rate is by refinancing your student loans through a private lender.
This isn’t the right option for everyone, mostly because you’ll lose out on a lot of protections, such as loan forgiveness and IDR plans.
But if you don’t mind trading these federal student loan benefits for a lower interest rate, you can see if you qualify for a student loan refinance with cashback.
5. You’re trying to get PSLF and already started making payments
In order to get PSLF, you need to make 120 qualifying payments on qualifying loans. But if you consolidate your loans, the clock on those payments restarts entirely. If you’ve been making qualifying payments on your eligible loans for a while, you might want to rethink consolidating those loans because it will wipe out that payment history.
If you have multiple loans — some of which qualify for PSLF and some of which don’t — one way to get around this is by separating them into two batches. You can consolidate the non-eligible loans and leave the PSLF-eligible loans alone. It’s not a perfect solution, but it’s one way to still get the benefits of consolidating your loans without losing traction toward loan forgiveness.
How to get a Direct Consolidation Loan
If you’ve weighed the pros and the cons and decided loan consolidation is right for you, the next steps are quick and easy.
Step one: Confirm you’re eligible for a Direct Consolidation Loan
To start, you’ll need to make sure your loans are eligible. You can consolidate just about any federal student loans together, except Parent PLUS loans and private student loans. Each of your student loans must also be in repayment or in a grace period. You can’t currently be in default, forbearance or deferment.
If your loans are in default, you can still consolidate them if you make at least three consecutive, on-time payments, pay off any wage garnishments (if applicable) and agree to enter into an income-driven repayment plan with the new consolidation loan.
Step two: Complete the application
You can complete the application to consolidate your loans by logging into the StudentLoans.gov site. You can either complete the form directly online or print out the form and send it in.
It should take you less than half an hour to complete the application, and you’ll need to do it in a single sitting.
Step three: Wait to hear from your new servicer
After you complete the application, keep making payments to your current servicer(s) until your new loan servicer gets in touch with you with next steps. Then you’ll switch over to making payments to your new loan servicer instead.
Apply for a Direct Consolidation Loan early
Consolidating all of your loans together is a popular option. And if you’re just graduating, it’s better to decide early on whether you’ll go this route or not.
That’s because if you’re going to take advantage of the perks that consolidation offers you, such as qualifying for income-driven repayment or PSLF, now’s the best time to get started. That way, you may potentially be out of debt faster than if you’d waited.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
