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Education Center

Federal Direct Consolidation Loans: The Full Story

How to use a Federal Direct Consolidation Loan to find relief from student loan debt.

Roughly 80% of student loan debt comes from federal loan programs.Debt consolidation groups education costs together

If you’ve ever used a debt consolidation loan to take care of credit card debt problems, you may think you understand how a Federal Direct Consolidation Loan works for student loan debt.

You’d be wrong.

You use a Federal Direct Consolidation to consolidate federal student loan debt into one easy payment. But the loan structure, interest rate and how you qualify varies greatly from other types of consolidation loans.

This guide is designed to help you fully understand how these loans work. If you just want a quick and easy snapshot, you can visit our Solutions page for Federal Debt Consolidation Loans. You can also call [PHONE_NUMBER] to speak with a student loan consolidation specialist confidentially at no charge.

What is a Federal Direct Consolidation Loan?

  • Federal” refers to a public loan that’s financed through a government program.
  • Direct” refers to the federal program that these loans originate under. They come through the William D. Ford Direct Loan Program.
  • Consolidation” refers to the financial process of rolling multiple debts into a single financing option with only one monthly payment.
  • Loan” means you’re taking out a new debt, with a set term and interest rate that apply

In other words, if you have federal student loan debt, you can apply for a new loan through William D. Ford Direct Loan Program to consolidate your existing loans. The funds you receive are disbursed to pay off your original federal student loans, leaving only the consolidation loan to pay off.

What’s the advantage of Direct Consolidation?

Consolidating debt is generally done to simplify debt repayment. If you have multiple individual debts to repay it can get complicate to juggle all those bills within your budget. Consolidation reduces that down to just one bill, so debt is easier to manage.

However, that’s not the only advantage of Federal Direct Consolidation Loans. In this case, taking out this type of loan provides an additional benefit that can be significant, depending on your situation. Namely, you can bring defaulted federal student loan debt current by using a Direct Consolidation Loan.

If you have federal loans in default, it means you aren’t eligible for Federal Repayment Plans or Public Service Loan Forgiveness. You also aren’t eligible for any new financial aid if you need to continue your education.

Normally to bring defaulted federal student loans current, you would need to make at least nine consecutive payments on time to get each loan up to date. If you’re already struggling to keep up with your payments, that can be tough. With this option however, you consolidate and pay off debt to immediately fix the default status on your debt.

A warning about Direct Consolidation for defaulted debt

One thing that’s critical to note – if you use a Direct Consolidation Loan to bring defaulted debt current, you will not erase the credit damage caused by the previous missed payments!

By federal law, credit damage caused by missed payments on student loans are one of the few negative items that can be removed from your credit report completely in less than a year. If you make 9 consecutive payments on a defaulted student loan it becomes current and all previous missed payments are removed from your credit report. From a credit standpoint, it’s like the default never happened.

However, if you bring defaulted debt current by consolidating with a Direct Consolidation, you bring the debt current but you don’t remove the previous negative remarks from your credit report. This is something to consider if you’re behind but have a goal to minimize credit damage as much as possible. If that’s the case, you may prefer to try bringing all of your loans current with consecutive payments.

Everything you need to know about Federal Direct Consolidation Loans

How Direct Consolidation works:

  1. You apply for a Federal Direct Consolidation Loan through StudentLoans.gov – there’s an online application or you can download a print version and mail it in.
  2. In order to qualify you must have at least one Direct student loan among the debts you plan to consolidate; if you do, most federal loans can be consolidated (more below)
  3. The loan servicer for all Direct loans, including this consolidation loan, is the Direct Loan Servicing Center.
  4. The interest rate on the new loan will be a weighted average of the rates on the federal loans you currently hold (more information below).
  5. The term on the loan is determined by the amount of federal student loan debt you have to repay (see below).
  6. Once approved, the funds are disbursed directly to your original loan servicers to pay off all of your previous loans – this is where defaulted debt becomes current

Determining the interest rate

The interest rate on your new loan is not dependent on your credit score, which is good news if defaults have damaged your credit. Instead the rate is determined by taking a weighted average of your current rates, then adding 1/8 of 1%.

The weighted average refers to giving greater importance to your largest volume debts. So if you have a $5,000 loan at 5% and $10,000 at 6% then the weighted average would be closer to six. Then you add 1/8 of 1% to that average. In other words, if your weighted average rate ended up being 5.75% then the final rate on the consolidation loan would be 5.875%

What types of loans can be consolidated

Remember, you must have at least one Direct loan among the debts you want to consolidate with a Direct Consolidation Loan. If you do then you can include any of the following:

  • All Direct Loans (subsidized or unsubsidized)
  • All Stafford Loans (subsidized or unsubsidized)
  • PLUS loans from both the Direct and FFEL program
  • Perkins Loans
  • Supplemental Loans for Students (SLS)
  • Federal Nursing Loans
  • Health Education Assistance Loans
  • Other Federal Direct Consolidation Loans

Really, the only types of debt that can’t be included are private student loans (those that come from a private financial institution) and PLUS loans parents made on behalf of the borrower who is consolidating. In other words, if your parents took out a PLUS loan to help pay for your education and you have several loans in your name, you can only consolidated yours – you can’t take on their debt even though it benefited you.

And yes, Federal Direct Consolidation Loans can be re-consolidated with a new Federal Direct Consolidation Loan as long as you have at least one new Direct loan included in the mix. So if you already consolidated once then continued your education and need to consolidate again, you can.

What determines the term?

The amount of debt you have sets the term length on your consolidation loan:

Total federal debt to consolidate Loan term
Less than $7,500 10 years
$7,500 – $9,999 12 years
$10,000 – $19,999 15 years
$20,000 – $39,999 20 years
$40,000 – $59,999 25 years
More than $60,000 30 years

Fees and penalties

There are no fees for consolidating and no penalties for early repayment. So you can consolidate without adding to what you owe. You can also pay the balance off faster if you have the funds without penalties.

Direct consolidation restrictions and additional notes

Restriction on defaulted borrowers

As described above, one of the benefits of consolidating this way is that it immediately brings defaulted debt current so you can qualify for Federal Repayment Plans. But to clarify, not only does this make you eligible – the law requires you to enroll in one of the three available hardship-based repayment plans. This includes:

  • Income-Based Repayment
  • Income-Contingent Repayment
  • Pay As You Earn

Once you enroll in one of those programs, the repayment schedule and term of your loan may change based on you situation. Income and family size determine the term length on these programs; the term can be up to 25 years.

Other restrictions on eligibility

You must be out of school in order to consolidate. This means you’ve graduated, dropped out, or dropped below half time enrollment. If you’re still going to school, you have to wait to finish before you can use this option. However, you should also be aware of grace periods on federal student loans.

With most federal loans, you have a certain amount of time after leaving school or dropping below half-time enrollment before you have start repaying your loans. Stafford loans start repayment 6 months after and Perkins loans extend out to 9 months. If you jump the gun on consolidating and do it too early, you can eliminate this grace period almost entirely.

When does repayment on the consolidation loan start?

You must start to repay a Federal Direct Consolidation Loan within 60 days after the loan is disbursed. This ensures the final payments on your original loans don’t overlap with the first payment on the new loan.

Do I have to consolidate all of my federal loans?

No. There is no requirement to include all federal student loan debt in a Direct Consolidation Loan. If you want to keep a few loans out to ensure you get a lower term, you can do so.

In fact, you can even strategically split your federal student loan debt into multiple Federal Direct Consolidation Loans. Let’s say you have $20,000 in federal student loan debt. If you consolidated with a single loan, that would be a 20-year loan. However, if you have room in your budget to pay off the debt faster, you might choose to take out 2 Federal Direct Consolidation Loans instead. That would give you 2 loans, each with a 10-year term.

Just be aware that you are limited to taking out one of these loans every 180 days. In other words, you could consolidate the first half of your debt, but then you’d have to wait 6 months to consolidate the rest.

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