A Guide to Federal Student Direct Loan Consolidation

Borrowers with multiple federal student loans may find it difficult to keep track of making several payments a month.


To streamline the process, borrowers have the option to consolidate some or all of their federal student loans into one. Rather than multiple loans with differing interest rates, borrowers who consolidate all of their student loans would have one monthly payment at a fixed interest rate.

Consolidation is not for every borrower, however, so here are some factors to consider before applying for a federal direct consolidation loan.

Qualifying Types of Federal Student Loans

Borrowers must have the right type of student loans to qualify for consolidation. Most federal student loans qualify, including:

— Subsidized, unsubsidized and nonsubsidized federal Stafford loans

— Direct PLUS loans

— Supplemental loans for students

— Federal Perkins loans

— Nursing student loans

— Nurse faculty loans

— Health education assistance loans

— Health professions student loans

— Loans for disadvantaged students

— Direct subsidized and unsubsidized loans

— PLUS loans from the Federal Family Education Loan program

— Some FFEL consolidation loans and direct consolidation loans

— Federal insured student loans

— Guaranteed student loans

— National direct student loans

— National defense student loans

— Parent loans for undergraduate students

— Auxiliary loans to assist students

[Read: Understanding the Types of Federal Student Loans Available.]

“There’s still an option of possibly consolidating student loans under a private lender,” says Jeff Arevalo, financial wellness expert at GreenPath Financial Wellness. “But the thing to keep in mind is that the borrower’s credit and debt-to-income ratios are going to come into play for that. And if you do consolidate into some type of private loan product, then you may lose some of those protections and flexibility that you have when they are still under the federal umbrella.”

Borrowers who can consolidate may also lose certain benefits, like principal rebates, loan cancellation or interest rate discounts, according to the U.S. Department of Education.

Should I Consolidate My Federal Student Loans?

Consolidation is advantageous for borrowers interested in the federal Public Service Loan Forgiveness program.

To be eligible for the program previously, borrowers needed be employed full-time by a U.S. federal, state, local, or tribal government or nonprofit organization in a qualifying job; have direct loans; be on an income-driven repayment plan and make 120 qualifying payments. But due to the establishment of the limited PSLF waiver on Oct. 6, 2021, any prior period of repayment now temporarily qualifies for PSLF, regardless of the loan program.

All nondirect federal student loans, such as FFEL program loans or Perkins loans, have to be consolidated into the direct loan program before the limited waiver expires on Oct. 31, 2022.

Under ordinary circumstances, consolidating federal student loans erases any progress a borrower has made toward PSLF by restarting the clock. Essentially, previous qualifying payments made toward student loan forgiveness no longer count.

Consolidation also provides borrowers a chance to change their student loan servicer, experts say. It can also lower monthly payments by giving borrowers up to 30 years to repay their loans.

Although borrowers can increase the length of repayment, their interest rates could be higher. Taking longer to pay back the loan typically means more money paid in interest over time.

[Read: How Your Existing Student Loan Debt Affects Graduate School Options.]

As part of the current federal student loan payment pause that began in March 2020 with enactment of the federal CARES Act, the interest rate for direct consolidation loans is 0%. But when repayment resumes after Dec. 31, 2022, all direct consolidation loans will have a fixed interest rate, which will be determined by the weighted average of the statutory interest rates on the loans being consolidated rounded up to the nearest one-eighth of 1%. And there will be no cap on the consolidation loan’s interest rate.

When deciding whether to apply for a consolidation loan, consider the interest you will pay “versus what you were paying,” says Dan Claffey, director of EdMD, a college admissions and financial aid consulting firm.

“That can be hard for people to figure out when you have eight different loans at eight different interest rates with eight different balances,” Claffey says. “Borrowers should make sure that they compare those numbers themselves before they just jump in and assume that they are going to save money because they are looking at the payment.”

Another important consideration is that if you do the loan consolidation, any interest owed on loans to be consolidated will be added to the principal of your consolidation loan. This is called capitalization and means that interest will have to be paid on a higher principal balance than may have been the case had you not consolidated.

It’s also important to note that federal student loans in default can be consolidated and, in some cases, reconsolidated.

How to Apply for Federal Student Loan Consolidation

There’s no credit check to qualify for consolidation, and there’s no application fee.

Borrowers can apply directly through the Federal Student Aid website or download and print a paper application to submit via mail to the chosen consolidation servicer. Those servicer options currently include Aidvantage, Great Lakes Educational Loan Services, HESC/EdFinancial, MOHELA, Nelnet and OSLA Servicing.

Be prepared to enter personal information, including a phone number and email, as well as financial information such as account statements, bills and education loan records. You must have a verified FSA ID.

[Read: See How Average Student Loan Debt Has Changed in 10 Years.]

You will also be asked to indicate which loans you want to consolidate and select a repayment plan. Processing of your application can be delayed if any of the loans chosen for consolidation are in a grace period.

The form, which is free to complete, takes an average of 30 minutes or less, according to the Department of Education. After consolidation, borrowers will have a single monthly payment.

The application is time-stamped. As long as borrowers submit it by Oct. 31, they will still qualify for the limited waiver even if it’s not processed until after that date.

“Consolidation is taking a little bit longer than normal due to Biden’s recent announcement of forgiveness,” says Jan Miller, president of Miller Student Loan Consulting, LLC. “Be patient.”

In August, President Joe Biden announced plans to cancel up to $10,000 in federal student loans for those earning less than $125,000 a year and up to $20,000 for borrowers who had a Pell Grant while in college.

Who Do I Contact if I Need Help?

Borrowers with questions about federal student loan consolidation can contact the Federal Student Aid Information Center, known as the FSAIC, which provides support on behalf of the Department of Education. The FSAIC’s help number is 800-433-3243.

But the best point of contact, experts say, are your student loan servicers.

“They are the ones that handle the consolidations and that’s who borrowers should be talking to,” Claffey says. “Not a third party that sends them something in the mail or sends them a soliciting email.”

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

More from U.S. News

Grad PLUS Loans: Everything You Need to Know

13 Advantages of Federal Student Loans

Is College Worth the Cost? Factors to Consider

A Guide to Federal Student Direct Loan Consolidation originally appeared on usnews.com

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