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Part of the Series How to Pay Off Your Student LoansWhat You Need to Know
Ways to Pay Off Loans
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A direct consolidation loan combines two or more federal education loans into a single loan. This loan comes with a fixed interest rate that is based on the weighted average of the rates of the consolidated loans. Combining debt through the direct consolidation loan program includes a free application for the borrower.
Direct consolidation loans allow borrowers to lower the number of loan payments they have to make each month by combining them into a single payment. Loans are managed by the U.S. Department of Education, and the application is free. Most federal loans are eligible for consolidation, but private loans are not. Borrowers can consolidate once they complete or withdraw from school or fall below half-time student status.
Borrowers who obtain a direct consolidation loan also access loan forgiveness options. Loan forgiveness programs allow borrowers to cancel their obligation to repay all or a portion of the remaining principal and interest owed on a student loan. Common forgiveness programs include the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness (PSLF) program. In most cases, student loan forgiveness is not considered taxable income and borrowers are not required to pay income tax on canceled or forgiven balances.
Direct consolidation loans are issued through the Federal Direct Student Loan Program. The Federal Direct Student Loan Program allows students and parents to borrow directly from the U.S. Department of Education.
Before consolidating, borrowers should consider benefits associated with the original loans, such as interest rate discounts and rebates. When the loans are rolled into a new direct consolidated loan, borrowers may lose benefits. Additionally, if the new loan increases the repayment period, the borrower will likely pay more interest.
After completing a free application, the borrower confirms the loans and agrees to repay the new direct consolidation loan. The borrower will have a single monthly payment on the new loan instead of multiple monthly payments on several loans.
Borrowers may be eligible for repayment terms of up to 30 years with one monthly payment. This makes it easier to keep track of a student loan balance. Direct consolidation loans have a fixed interest rate, and borrowers may access different repayment options.
The options include:
Loans come out of default status once consolidated if borrowers meet specific requirements.
When loans are consolidated, the interest on the consolidated loan is based on a weighted average of the rates on their old loans, rounded to the nearest one-eighth of a percent (0.125%). The interest rate on a consolidated loan may be higher or lower than the average rates of the previous loans.
Because consolidation extends the repayment period, the borrower's monthly payment is lowered but may result in paying more money over the life of the loan. A direct consolidation loan does not come with a grace period. The repayment period starts immediately upon consolidation, with the first payment due in about 60 days.
In August 2022, the Biden administration announced a plan to forgive up to $20,000 in student loan debt for borrowers who had received Pell Grants and $10,000 for other borrowers, at a total cost of $430 billion. However, the Supreme Court struck down this plan in June 2023. The court ruled the administration lacked the authority under existing federal law to cancel the debt.
In response to the decision, the White House unveiled the Saving on a Valuable Education (SAVE) plan, a new income-driven repayment (IDR) option. Features of the plan include:
On July 18, 2024, a federal appeals court blocked the SAVE plan until two court cases centered around the IDR plan can be resolved. The Department of Education has moved borrowers enrolled in the SAVE plan into an interest-free forbearance while the litigation is ongoing. It has also outlined options for borrowers who were nearing Public Service Loan Forgiveness (PSLF)—borrowers can either "buy back" months of PSLF credit if they reach 120 months of payments while in forbearance or switch to a different IDR plan.
Borrowers can consolidate subsidized and unsubsidized Stafford loans, Supplemental Loans for Students, Federally Insured Student Loans, PLUS loans, direct loans, Perkins loans, and any other type of federal student loan.
The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. If the weighted average interest on the loans is 6.20%, for example, the new interest rate will be 6.25% after consolidating.
By opting for direct loan consolidation, borrowers can access income-driven repayment plans. They may also opt for direct loan consolidation if they want to be eligible for certain loan forgiveness programs. With an income-driven repayment plan under the SAVE Plan, borrowers can qualify for forgiveness of the remaining balance after 20 years.
The terms on a consolidated loan range up to 30 years, depending on the balance and repayment schedule.
Borrowers who juggle multiple payments on many federal student loans may want to consider a direct consolidation loan. This program combines the loans into a single loan with a fixed interest rate. There's no credit check required, and borrowers don't have to pay an application fee. Information is available on the Department of Education's website.
