What Is a Direct Consolidation Loan?

If you owe multiple federal student loans, you may consider combining them into one with a Direct Consolidation Loan. Direct Consolidation Loans are offered by the U.S. Department of Education and they can streamline repayment and extend your loan terms. 

Note that federal loan consolidation is different from student loan refinancing, though both can combine multiple debts into one. Federal loan consolidation won’t reduce your interest rate, but it will keep your student debt in the federal loan program. By contrast, refinancing federal loans with a private lender means replacing them with a private loan, thereby losing access to federal protections and repayment plans. 

Here’s a closer look at federal Direct Loan consolidation, including its pros, cons, and how to apply. 

Overview of Direct Consolidation Loans

If you owe federal student loans, you can consolidate one or more of them into a Direct Consolidation Loan. After consolidating, you can choose new repayment terms. You might opt for an income-driven repayment (IDR) plan or a standard plan with terms as long as 30 years, depending on your loan amount. 

Your new interest rate will be the weighted average of your previous rates rounded up to the nearest one-eighth of one percent. You’ll also get the chance to choose a new loan servicer. 

Consolidating multiple student loans into one can simplify repayment, as you’ll only have to make a single monthly payment. However, you don’t have to include all your federal loans in a consolidation. 

For example, you might consolidate an older loan type, such as an FFEL or Perkins Loan, to make it eligible for an income-driven plan while leaving your other loans as they are. Consolidation is also one way to get unpaid student loans out of default and back into good standing. 

Benefits of consolidation

Direct Loan consolidation has both pros and cons that are worth considering before you apply. Here are some of the potential benefits: 

• Simplify repayment: Consolidating multiple student loans can streamline repayment. Instead of having to make several payments to different loan servicers, you can pay a single bill each month to one of the federal loan servicers of your choice. 
• Reduce your monthly bills: If you select a longer repayment term or an income-driven repayment plan, you could make your monthly payments more affordable. 
• Gain access to income-driven repayment plans: Some federal loan types, such as FFEL and parent PLUS loans, must be consolidated before they’re eligible for income-driven repayment. Getting your loans on an IDR plan could also help you access student loan forgiveness. For instance, IDR plans offer loan forgiveness after 20 or 25 years of repayment. Plus, the Public Service Loan Forgiveness (PSLF) program requires that you make 120 payments on an IDR plan, along with meeting other criteria, to qualify for loan forgiveness. 

Potential drawbacks of consolidation

At the same time, consider these potential disadvantages of Direct Loan consolidation: 

• Could increase your interest charges: Choosing a longer repayment period means more time in debt and higher total interest costs as a result. 
• Will trigger interest capitalization: When you consolidate, any unpaid interest will be added onto the principal balance of your new loan. This means you might end up paying interest on top of interest, further increasing your cost of borrowing. 
• Could lose special benefits: If you consolidate debts other than Direct Loans, you may lose certain perks. Older loans types, such as FFEL or Perkins Loans, may include protections like rate discounts or cancellation benefits that aren't available on modern loans. If you have special benefits like these, they could be revoked after consolidating. 
• Not available for private student loans: Direct Loan consolidation is only an option for federal student loans — you can’t consolidate your private loans this way. 

What types of loans can I consolidate? 

Only federal student loans are eligible for Direct Loan consolidation. Private student loans are not eligible. Some loan types you can consolidate include: 

• Direct Subsidized and Unsubsidized Loans
• Direct PLUS Loans
• FFEL subsidized and unsubsidized loans 
• FFEL PLUS loans 
• Federal Perkins Loans
• Nursing Student Loans
• Nurse Faculty Loans
• Health Education Assistance Loans
• Health Professions Student Loans
• Loans for Disadvantaged Students
• FFEL Consolidation loans and Direct Consolidation Loans (under certain conditions)

Note that federal parent loans are eligible for consolidation, but you can’t consolidate them with a loan that the student borrowed themselves. 

Should I consolidate my student loans? 

If your goal is to combine multiple loans into one to simplify repayment, loan consolidation could make sense. It can also make certain loan types eligible for income-driven repayment, which can make your monthly payments more affordable. Plus, IDR plans are the only repayment options eligible for loan forgiveness through PSLF. 

However, loan consolidation may not be the right move if you have a lot of outstanding interest on your loans. That interest will capitalize, thereby increasing your cost of borrowing. If you can pay off your unpaid interest before you consolidate, you could prevent it from capitalizing. 

The bottom line is, loan consolidation can help you manage your payments more easily and lower your monthly bill, but in some cases it can make your student loans more expensive. 

Check Out: Is Student Loan Consolidation Right for Me?

How to apply for a Direct Consolidation Loan

There’s no cost to apply for a Direct Consolidation Loan, and you can submit your application on the Federal Student Aid website. It generally takes 30 minutes or less to fill out the form. You’ll need to provide your personal and financial information, as well as details about your loans. 

During this process, you can also select your preferred repayment plan. Federal Student Aid’s loan simulator tool can help you compare your options and estimate your monthly payments and total interest charges on each plan. 

Learn More: How To Consolidate Student Loans

Can I consolidate defaulted loans?

Federal loan consolidation is one way to get defaulted student loans back into good standing. If you go this route, you’ll have to either: 

• Agree to pay your new Direct Consolidation Loan on an income-driven repayment plan, or
• Make three consecutive, on-time payments on your defaulted loan before you consolidate it

Through September 2024, however, borrowers have a simpler option for getting out of default with the Fresh Start program. This temporary program makes it easy to get your loans out of default online or over the phone. Fresh Start will also restore your access to federal financial aid and remove the record of default on your credit report.