After graduating from college, you may leave school with more than one student loan. If juggling more than one loan feels overwhelming, a Direct Consolidation Loan might be a good option for you.
In this article, we’ll talk about what a Direct Consolidation Loan is, the pros and cons, and how to get a Direct Consolidation Loan.
What is a Direct Consolidation Loan?
A Direct Consolidation Loan allows you to combine multiple federal student loans into a single loan with a fixed interest rate.
For private student loans, something similar exists but with a different name: student loan refinancing. Refinancing allows you to convert private and/or federal student loans into one private loan. See this list of the best student loan refinance rates.
Pros and Cons of Getting a Direct Consolidation Loan
It’s important to weigh the pros and cons of a Direct Consolidation Loan before deciding to move forward. Sure, having to make a single monthly payment rather than making multiple payments a month toward your student loans sounds neat. However, there are more things to consider.
Pros
When you consolidate your student loans, you may be eligible for lower monthly payments because the repayment term will probably be longer. - Consolidating a loan could also open up new repayment options. Repayment plans for Direct Consolidation Loans include:
Standard repayment plan
Graduate repayment plan
Extended repayment plan
Income-contingent repayment
Pay As You Earn (PAYE)
Revised Pay As You Earn (REPAYE)
Income-Based Repayment (IBR) plan
- When loans are consolidated, the interest on the consolidated loan is simply the average of the old loans’ interest rounded to the nearest eighth of a percent. This means that the interest rate on a consolidated loan could be higher or lower than the initial interest rate on each individual loan.
For example, let’s say you have three loans. One loan has a 3.4% interest rate, and the other two have a 5% interest rate. Consolidated, the interest rate would be 4.47%, better than 5% interest.
Cons
Consolidating your student loans could mean taking on a longer repayment term, which could also mean more interest paid over time. Not only are you paying for your loan, you’re also paying for the interest that comes with each additional year that it takes to repay your loan.- Sure, your monthly payments will be low because your loan repayment amount is scattered over a longer period of time, but the interest is what will cost you more money the more time it takes to pay your loan back.
- Once you consolidate your loans, you won’t get a grace period. The first payment will be due in about 60 days after your loan is disbursed.
- Finally, consolidating your loans could make you lose certain benefits, such as reduced interest rates, rebates, and loan cancellation benefits that could be available under certain loans you may have. Whatever benefits you had with those loans leaves if you consolidate them.
How Long Does it Take to Get a Direct Consolidation Loan?
Getting a Direct Consolidation Loan will take time. It typically takes 30-45 days to consolidate your loan, but it can take up to a few months.
However, filling out the Direct Consolidation Loan Application doesn’t take too long. If you are interested in applying for a Direct Consolidation Loan, the process must be completed in one sitting. In general, it takes around 30 minutes or less to complete.
Can Direct Consolidation Loans be Forgiven?
Did you know that consolidating your loans can make you eligible for the Public Service Loan Forgiveness program (PSLF)? The PSLF program is a federal loan forgiveness program for those employed in an eligible public service or nonprofit role. After ten years of making payments on your Direct Consolidation Loans, the Department of Education will forgive your remaining balance.
Keep in mind that due to the COVID-19 pandemic, past payments that aren’t typically eligible for loan forgiveness under this program can now be forgiven through the PSLF waiver. This means that if you have not consolidated your loans but you work for a qualifying employer and have been making payments, those payments can count toward the program if you consolidate your loans by Oct. 31, 2022.
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Final Thoughts
Determining whether to consolidate your federal loans can be a tough decision to make. If you are passionate about public service or non-profit work, consolidating your loans might be the best option for you, but if you want to save as much money as possible in the long-term, it might make sense if you don’t do so. Weighing the pros and cons in relation to your situation can ease the concerns of whether or not consolidating your loans is a good option for you.
If you need help choosing the best student loan refinancing option for your private loans, Sparrow is a great place to start. Sparrow’s rate comparison tool allows you to easily compare rates side-by-side to find the best student loan refinance option for you. Get started today!