A direct consolidation loan allows a borrower to combine several federal student debts into one. By so doing, you’ll be able to make a single monthly payment instead of a multiple student loan payments. It is a short term consolidation opportunity offered by the United States Department of Education that started in January 2012.
There are number of benefits that accrue from this arrangement. The interest rates are lower and fixed, there is a longer period of time to complete the repayment and it is possible to rebuild damaged credit by consolidating defaulted student debts.
Types of direct consolidation loans
There are two types of direct consolidation loans: the traditional type and the special type. The two have several similarities as well as differences between them. In the traditional type, all debts are considered together under new terms.
The debts in the special type, on the other hand, are considered separately with each maintaining its original terms.
Borrowers that apply successfully for the traditional type have more time to repay which means that the monthly payments will be lower. In most cases, however, you’ll end up paying back much more.
The advantage of the special type is that since each debt is considered separately, the total interest rate is often lower. Both types are also eligible for a slight reduction in interest rates for borrowers that repay using the automatic debit system.
The application process is free. You can get more information and apply online at studentloans.gov. Alternatively, a copy of the application form and a promissory note can be mailed to you or you can simply call in for application assistance.
It is required that the repayment direct consolidation loans begins following disbursement. The first payment is expected within 60 days and you could be allowed up to 30 years to repay your loan. Deferment and forbearance are possible under special circumstances.
Most federal student loans are eligible for consolidation, including the following:
- Direct Subsidized & Unsubsidized Loans
- Subsidized & Unsubsidized Federal Stafford Loan
- Direct PLUS Loans
- Supplemental Loans for Students (SLS)
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Federal Nursing Loans
- Federal Perkins Loans
- Health Education Assistance Loans
- and some existing consolidation loans
Points To Consider
You should carefully consider if a direct consolidation loan is the best option for your situation. Indeed, a loan consolidation can definitely simplify your loan repayment by consolidating your loans into one affordable monthly bill and can even allow you up to 30 years to repay your loans. You may also have access to additional repayment plans as well that could enable you to switch a variable interest rate loan to a fixed interest rate.
However, be aware that if you extend the length of your repayment period, you’ll also end up making more payments and paying more interest as a result. So be sure to make a side-by-side comparison of your current monthly payments and the amount your monthly payments would be if you do a loan consolidation.
One other important point to consider is any impact and loss of any borrower benefits that you may have had with your original loans. You might lose any borrower benefits from your original loans such as principal rebates, interest rate discounts, loan cancellation benefits or other. So you definitely want to consider all of these factors when weighing your options.
Carefully reevaluate your budget and income situation if you want to lower your monthly payment amount but are concerned about the impact of loan consolidation. Also consider other options such as deferment or forbearance for short-term payment relief.
Be advised that once you make the decision to combine your loans into a Direct Consolidation Loan, it is final decision and cannot be removed. All the prior loans that you consolidated will be paid off in full and no longer exist.
For more information on the Direct Consolidation Loan process, visit: studentloans.gov