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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 qualify for 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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|