Direct loan consolidation is a federal loan that combines two or more federal education loans into one loan with an interest rate based on the average interest rate on the consolidated loan. If you have federal loans through the Federal Family Education Loan (FFEL) program or the Perkins Loan Program, you can combine these loans to get different repayment plans.
Most federal education loans are eligible for consolidation after medical school graduation. Loans not eligible for consolidation include public or private loans that are not federally guaranteed. If you consolidate any loan covered by the Public Interest Loan Forgiveness Program (PSLF), such as a direct loan, you will lose credit for any qualifying payments made prior to the consolidation.
In addition, if you qualify for Public Service Loan Forgiveness (PSLF), which provides tax relief after 120 eligible payments, it may be beneficial for you to pool so you can qualify for income-based plans. For example, if you want to consolidate loans other than direct loans, you can access multiple income-related repayment plans and be able to apply for a public service loan amnesty. If you have Parent PLUS loans or another type of loan on this list and are having difficulty making payments, you can consolidate your student loans to qualify for an income-based repayment plan.
If you have direct loans that you don’t want to consolidate, probably because they’re almost paid off, you’ll still need to take those payments into account when calculating how much you can pay each month on a consolidated loan. After consolidating your loans, you only have to make one payment per month instead of making multiple payments across different loans. After the repayment is complete, the borrower will make monthly payments on the new direct consolidation loan instead of monthly payments on the original loan.
Because consolidation extends the repayment period, perhaps up to 30 years, your monthly payment decreases, but it also requires you to pay more money over the life of the loan. This can also be a disadvantage of the federal Direct Consolidation Loan program because a longer repayment period usually means making more payments and paying more interest over time. Because of the cost, consolidation may be the best choice in some cases, especially if you plan to pay off your loans over a long period of time.
If you have one or more loans with significantly higher interest rates, it’s a good idea to keep them out of consolidation and focus your early repayment efforts on them to get rid of them faster. If you extend the loan term from 10 to 30 years, you will pay significantly higher interest over the life of the loan.
If your payments are available after consolidation and you continue to make your payments on time, your credit score will start to improve. While student loan consolidation may reduce your monthly payment by extending the repayment period, you will usually end up paying more due to the extra interest you pay when you extend the loan term. While student loan consolidation simplifies multiple loans into one simplified payment, it’s likely that over time it will increase the amount of interest payable, meaning you won’t be able to save money through consolidation.
Refinancing works much the same way, but unlike consolidation, refinancing can combine federal and private student loans if you still only want to make monthly payments. If you like the idea of consolidation, but the combined weighted interest rate won’t save you much over the life of your loan, you may want to consider refinancing your student loans with a company like SoFi.
If you send federal loan payments to more than one lender each month and want the convenience of a single monthly payment, consolidation may be for you. In this case, consolidation can make your life easier because the process will give you one loan with only one account each month.
If you already have delinquent student loans, if you agree to repay a new loan under the IDR program, or if you made three voluntary, timely, and complete monthly payments on delinquent loans prior to consolidation, loan consolidation can help you repay that Loan. With bad loans accelerating and your entire outstanding balance due at default, consolidation is worth considering because it allows you to pay off one or more federal student loans with a new direct consolidation loan. Direct-payment consolidation loans can actually reduce your total monthly education-related debt payments, giving you up to 30 years to pay off your loan.
If you can’t afford to pay off your loan in full, consolidation is the quickest way to avoid default and sign up for one of the other U.S. Department of Education payment plans. Through consolidation, you can access a previously unavailable repayment plan. Consolidation is beneficial for those who do not need to lower their monthly loan repayment obligations, but want to lock in a low fixed rate.
Direct and unsubsidized subsidized loans can be combined when borrowers are in grace period or any time the borrower is no longer registered full-time. Borrowers can combine subsidized and unsubsidized Stafford loans, supplemental student loans, federally insured student loans, PLUS loans, direct loans, Perkins loans, and any other type of federal student loan.
Getting a direct consolidation loan may force you to miss out on the benefits associated with your current loans, such as stock discounts, interest rate discounts, or loan cancellation benefits. If you have missed payments due to having a hard time keeping up with multiple loan providers and multiple repayment dates, consolidation or refinancing is a viable choice. Any unpaid interest will be added to your principal balance upon consolidation, which means you may end up paying interest on a higher loan amount.