How to Decide If Direct Loan Consolidation Is Right for You

direct loan consolidation

If you have a lot of federal student loans, it can be hard to keep track of everything. Direct Loan Consolidation can help simplify your student loan repayment strategy and may even lower your monthly payments.

Loan consolidation pays off your existing loans by taking out one new loan in their place. Instead of multiple payments throughout the month, you can have a single – and sometimes lower overall – monthly payment.

While a Direct Consolidation Loan can be a great choice in certain situations, it’s not always the best strategy, nor are all loans eligible. Take the time to review your situation and the benefits and drawbacks of Direct Loan Consolidation before making a decision.

When to choose Direct Loan Consolidation

Depending on your situation, using a Direct Consolidation Loan could be a great strategy to help pay down your debts more quickly:

1. You want to simplify your loans into one monthly payment

If tracking all your student loan payments is driving you crazy, Direct Loan Consolidation may inject a well-needed dose of sanity into your life and budget. Check the federal student aid website for a list of the types of loans that qualify.

2. You want access to Income-Driven Repayment options

Federal Direct Subsidized and Unsubsidized Loans are eligible for all income-driven repayment plans.

However, other types of federal loans must be part of a consolidation loan to be eligible for income-driven plans. These loans include:

  • Stafford Loans
  • Unsubsidized Stafford Loans
  • Federal PLUS Loans made to graduate and professional students
  • Federal Perkins Loans

If you have these types of loans and are struggling to make your payments, you may want to consolidate your student loans in order to qualify.

3. You want to access student loan forgiveness options

Income-Driven Repayment (IDR) plans can not only potentially lower your monthly payments, but they also qualify you for forgiveness of the remaining balance at the end of the repayment term.

Plus, if you are eligible for Public Service Loan Forgiveness (PSLF), which provides tax-free forgiveness after 120 qualifying payments, it’s to your benefit to consolidate so that you’re eligible for income-driven plans.

Even if you’re not eligible for PSLF, the regular forgiveness options under IDR plans shouldn’t be ignored. You just have to wait a little longer – 20 to 25 years – and pay federal income tax on the forgiven balance.

4. You want to convert from variable interest rates to a fixed-rate loan

If you have federal loans (except Perkins Loans) that were disbursed before July 1, 2006, one or more of your loans may have a variable interest rate.

Because Direct Consolidation Loans have fixed rates only, you don’t have to worry about your interest rate going up and down over time. And if interest rates are steadily increasing, locking in a fixed rate can save you money over the long run.

When to avoid Direct Loan Consolidation

While a Direct Consolidation Loan may be beneficial to some, there may be other strategies you can use to save more as you pay down your student debt.

1. You don’t qualify

Certain loans, including private student loans, don’t qualify for the Direct Loan Consolidation program. Keep in mind that if you’re a parent with Parent PLUS loans, you can consolidate through a Direct Consolidation Loan on your own. You can’t, however, consolidate your loans with loans that the student received.

2. You don’t want to lose your federal repayment options

Because consolidating student loans effectively erases the original loans, any benefits you had under the original loan’s terms will no longer be available to you. Keep this in mind if you are hoping to apply for PSLF.

With PSLF, you need to make 120 qualifying payments on the loan before you receive forgiveness. If you consolidate your loans, the qualifying payments you made don’t transfer to the new loan.

The same goes with Perkins Loans. If you have these loans and consolidate, you’ll no longer qualify for loan cancellation under that program. Be sure to talk to your servicer before consolidating to be sure you won’t lose any benefits that you’d prefer to keep.

3. You want to strategically pay off loans with higher interest rates first

Consolidating your student loans won’t necessarily lower your interest rates. Instead, the process involves taking the weighted average of the old loans and adding a small percentage on top.

So, if you have a loan or loans with significantly higher interest rates, it may be better to leave those out of a consolidation and focus your early repayment efforts on them to get rid of them more quickly.

4. You want to save money by refinancing with a private lender

If you have a solid income and great credit, you may be able to score a lower interest rate, a lower payment, or both through refinancing.

Some of the top student loan refinancing lenders offer competitive interest rates to those who qualify. Just keep in mind that you’ll lose your federal loan benefits if you go this route.

Also, the lowest rates refinancing lenders offer are typically variable rates and come with shorter repayment terms.

Before choosing to refinance, make sure you’re really ready to forego all of the benefits associated with your federal loans.

5. You want to avoid increased interest charges over the lifetime of the loan

Even if you’re not on an income-driven repayment plan, Direct Loan Consolidation will usually lower your monthly payment. This is accomplished by lengthening the repayment term, which means you’ll pay more in interest over the lifetime of the loan.

If your goal is to pay as little interest as possible, consolidation may still work out. But you’ll need to make extra payments to shorten the repayment period. Use our prepayment calculator to see how the math can work in your favor.

Consider all the factors carefully

Consider the benefits and drawbacks of Direct Consolidation Loans carefully to create a repayment strategy that takes all your goals into account. Remember: Just because a loan is eligible doesn’t mean you have to include it.

Also, know that there’s more to repayment than just math. You likely have other financial goals you want to work – make sure your student loan repayment strategy works with those. For example, if you plan to buy a home, staying in debt longer with a Direct Consolidation Loan may not be appealing.

If you end up deciding that Direct Loan Consolidation is the best choice for you, use our consolidation tool to get started on your application.

Ben Luthi contributed to this article.

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