- What are the benefits of a Direct Consolidation Loan?
1. What are the benefits of a Direct Consolidation Loan?
Direct Consolidation Loans allow borrowers to combine one or more of their Federal education loans into a new loan that offers several advantages.
One Lender and One Monthly Payment
With only one lender and one monthly bill, it is easier than ever for borrowers to manage their debt. Borrowers have only one lender, the U.S. Department of Education, for all loans included in a Direct Consolidation Loan.
Flexible Repayment Options
Borrowers can choose from multiple plans to repay their Direct Consolidation Loan. including plans that base the required monthly payment amount on the borrower's income. These plans are designed to be flexible to meet the different and changing needs of borrowers. With a Direct Consolidation Loan, borrowers can switch repayment plans at anytime.
No Minimum or Maximum Loan Amounts or Fees
There is no minimum amount required to qualify for a Direct Consolidation Loan! In addition, consolidation is free .
Reduced Monthly Payments
A Direct Consolidation Loan may ease the strain on a borrower's budget by lowering the borrower's overall monthly payment. The minimum monthly payment on a Direct Consolidation Loan may be lower than the combined payments charged on a borrower's Federal education loans.
Retention of Subsidy Benefits
There are two (2) possible portions to a Direct Consolidation Loan: Subsidized and Unsubsidized. Borrowers retain their subsidy benefits on most types of subsidized loans that are consolidated into the subsidized portion of a Direct Consolidation Loan.
2. Who is eligible for a Direct Consolidation Loan?
To qualify for Direct Consolidation Loans, borrowers must have at least one Direct Loan or Federal Family Education Loan (FFEL) that is in grace or repayment status. Repayment status includes loans that are in a deferment or forbearance period. Loans that are in an in-school status cannot be included in a Direct Consolidation Loan.
Borrowers can consolidate most defaulted federal education loans, if they make satisfactory repayment arrangements with their current loan holder(s) or agree to repay their new Direct Consolidation Loan under the Income Contingent Repayment Plan or Income Based Repayment Plan .
3. Can I obtain a Direct Consolidation Loan if I don't have any Direct Loans?
Yes, borrowers without any Direct Loans may be eligible for a Direct Consolidation Loan if they consolidate at least one FFEL Loan.
4. Can I consolidate a PLUS Loan?
Yes, PLUS Loans can be consolidated into a Direct Consolidation Loan. However, if you consolidate a parent PLUS loan, your new Direct Consolidation Loan cannot be repaid under the IBR Plan.
5. Can I consolidate a Perkins Loan?
Yes, it is possible to consolidate Perkins Loans into a Direct Consolidation Loan if borrowers include at least one Direct Loan or Federal Family Education Loan (FFEL) in their request. Perkins Loans cannot be included in a Direct Consolidation Loan by themselves. Furthermore, all Perkins Loans consolidated into the Direct Loan Program will be included in the unsubsidized portion of the Direct Consolidation Loan.
Borrowers should carefully weigh the advantages and disadvantages of including a Perkins Loan in a consolidation loan. While the borrowers gain the benefits of the Direct Consolidation Loan Program, they also lose the benefits associated with the Perkins Loan Program.
We recommend that you consider the following points prior to making a decision:
- Borrowers may qualify for cancellation of some or all of their Perkins Loans in exchange performing certain kinds of public service. These cancellation benefits are lost when a Perkins Loan is included in a Direct Consolidation Loan.
- Perkins Loans have a grace period of 6-9 months. When a Perkins loan is consolidated, any remaining grace period is lost.
- Interest does not accrue when a Perkins Loan is placed in deferment. However, a Perkins Loan is included in the unsubsidized portion of a Direct Consolidation Loan, and borrowers are responsible for interest that accrues on the unsubsidized portion of a Direct Consolidation Loan during deferment periods.
- Perkins Loans generally have a lower interest rate but have a less flexible repayment period of 10 years.
6. Can I consolidate health professions loans?
Yes, With a Direct Consolidation Loan, borrowers can include certain health profession loans sponsored through the U.S. Department of Health and Human Services with other Federal education loans in their Direct Consolidation Loan. Borrowers must include at least one Direct Loan or Federal Family Education Loan (FFEL) Program loan in the Direct Consolidation Loan.
Eligible Health Professions Loans
- Health Professions Student Loans (HPSL)
- Health Education Assistance Loans (HEAL)
- Loans for Disadvantaged Students (LDS)
- Nursing Student Loans (NSL)
Direct Consolidation Loans offer many advantages to borrowers of health professions loans. These include:
- a longer repayment period, which may result in a lower monthly payment; AND a single monthly payment
When deciding to consolidate a health professions loans, consider the following advantages:
- Borrowers who have defaulted on a HEAL may include the collection costs and late fees in a Direct Consolidation Loan. These fees may not be included in HEAL Refinancing.
- To qualify for an in-school deferment, Direct Consolidation Loan borrowers must be attending school at least half-time. HPSL, HEAL, and LDS borrowers are required to attend school full time to be eligible for an in-school deferment.
Issues to Consider
Before applying for a Direct Consolidation Loan, consider the following points:
- HEAL loans have fixed or variable rates that are tied to the average 91-day Treasury bill rate plus 3 percentage points. There is no maximum interest rate for variable rate HEAL loans. In contrast, the interest rate for a Direct Consolidation Loan is based on the weighted average of the interest rates on loans being consolidated, rounded to the nearest higher one-eighth of one percent. It is a fixed rate. The interest rate for Direct Consolidation Loans that were made based on applications received prior to July 1, 2013 will not exceed 8.25 percent. For Direct Consolidation Loans that are made based on applications received on or after July 1, 2013, there is no cap on the interest rate.
- The interest on some health professions loans is subsidized by the U.S. Department of Health and Human Services. This interest subsidy is lost when these loans are included in a Direct Consolidation Loan.
- Interest does not accrue during deferment for HPSL, LDS, and NSL borrowers. Interest does accrue during deferment on the portion of Direct Consolidation Loans that repaid health professions loans.
- Borrowers who consolidate Health Professions Loans do not retain the deferment benefits that apply to those loans. However, they gain the deferment benefits that apply to Direct Consolidation Loans.
7. Can I consolidate my loans if I am enrolled in school?
Borrowers who are enrolled in school cannot consolidate loans that are in an in-school status. These are loans that have not yet entered or used up the 6-month grace period entitlement. However, borrowers may consolidate loans that are in an in-school deferment status.
Borrowers still can consolidate loans that are in grace or repayment (including loans that are in a deferment or forbearance period).
Example: A borrower who has education loans stopped attending school for a year and the loans used up the 6-month grace period and entered repayment. The borrower returned to school and obtained new loans, and received an in-school deferment on the earlier loans that had previously entered repayment. While enrolled, the borrower applies for a Direct Consolidation Loan. The Direct Consolidation Loan can include the first group of loans the borrower received that are in an in-school deferment status, but not the newly received loans that are in an in-school status. Once the borrower leaves school again he or she can submit a new Direct Loan Consolidation application to combine the original consolidation loan and the other remaining loans, or in some cases may be able to add the new loans to the existing consolidation loan.
Borrowers can add loans to an existing consolidation for up to 180 days after the Direct Consolidation Loan was first disbursed. If more than 180 days has passed, borrowers can apply for a new Direct Consolidation Loan. The new consolidation loan can include the original Direct Consolidation loan and must include another eligible outstanding Federal education loan.
8. Can I consolidate an existing consolidation loan?
Yes, in some cases:
- Borrowers can consolidate an existing Direct Consolidation Loan or Federal Consolidation Loan into a new Direct Consolidation Loan if they include at least one other FFEL or Direct Loan in the consolidation.
- Borrowers can consolidate a single Federal Consolidation Loan (without including any additional loans) if the loan is in
default status or has been submitted to a guaranty agency for default aversion by the loan holder. In this case, the new Direct Consolidation Loan must be repaid under the ICR or IBR plan.
- Borrowers can consolidate a single Federal Consolidation Loan (without including any additional loans) if they want to use the Public Service Loan Forgiveness Program or the no accrual of interest benefit for active duty service members.
NOTE: Your Federal Loan Servicer has information on the Public Service Loan Forgiveness Program and the no accrual of interest benefit for active duty service members.
Although borrowers may consolidate a single Federal Consolidation Loan without including any additional loans under certain circumstances (as explained above), an existing Direct Consolidation Loan may be consolidated only if at least one additional eligible loan is included in the consolidation.
9. Can I consolidate my loans that are in grace?
Yes. However, once grace status loans are consolidated borrowers lose any remaining grace period, unless they request delayed processing of their consolidation loan application (see FAQ #13). Borrowers receive their first bills within 60 days after the new Direct Consolidation Loan is made.
In some cases, borrowers who consolidate loans that are in the grace period may receive a lower interest rate on the new Direct Consolidation Loan:
- Some loans first disbursed before July 1, 2006 have variable interest rates that are lower during the grace period. If a borrower consolidates one of these variable rate loans during the grace period, this may result in a lower interest rate on the new Direct Consolidation Loan.
- Loans first disbursed on or after July 1, 2006 have fixed interest rates that are the same during all periods, including the grace period. While borrowers with fixed interest rate loans can consolidate while in grace, there is no potential interest rate benefit in doing so.
10. What special conditions apply if I am in repayment and just consolidating now?
Borrowers in repayment who want to consolidate their Federal education loans should continue making payments until their loan holder notifies them that their loans are paid in full.
11. Can I consolidate jointly with my spouse?
No, a married couple may not consolidate their individual Federal education loans into a single Direct Consolidation Loan as joint borrowers.
12. Can I Consolidate a Defaulted Loan?
Generally, Federal education loan(s) in default may be consolidated in a Direct Consolidation Loan if borrowers:
- Make satisfactory repayment arrangements on the defaulted loans with the current loan holder(s) before consolidating. OR
- Agree to repay the new Direct Consolidation Loan under either the Income Contingent or Income-Based Repayment Plan.
If, before applying for consolidation, borrowers want to completely clear the default notation from their credit records, they may want to consider another option: loan rehabilitation. Borrowers should contact their loan holders to obtain more information about this option.
Borrowers cannot consolidate defaulted loans under these conditions:
- If a judgment has been issued against a defaulted loan, it cannot be included in the consolidation unless the judgment order has been vacated (dismissed).
- If they are trying to consolidate defaulted Direct Consolidation Loans and do not include at least one additional eligible loan in the consolidation.
Note: Borrowers with defaulted FFEL or Direct Loan Program loans may be liable for collection costs incurred to collect the loans. If the holder of the defaulted loan, which may be either the U.S. Department of Education or a guaranty agency, retains a collection agency to collect defaulted loans, charges imposed by the collection agency may be added to the amount borrowers owe. This means that the amount of the Direct Consolidation Loan may include collection costs of up to 18.5% of the principal and interest outstanding on the defaulted loan.
For defaulted Perkins Loans and health professions loans. collection costs may equal as much as the amount owed at the time the defaulted loan is paid off through consolidation.
13. Can I delay processing of my consolidation application?
Yes, you can delay the processing of your Direct Consolidation Loan until closer to the end of your grace period end date if any of the loans you want to consolidate are in a grace period .
Normally, when you consolidate your existing loan(s) into a new Direct Consolidation Loan, you will be required to start repayment of your new loan immediately. However, if any loan you want to consolidate is still in a grace period, you can delay entering repayment on your new Direct Consolidation Loan until closer to your grace period end date by entering your expected grace period end date (month and year) in the space provided on the application. We will start processing your application about 45 days before the expected grace period end date that you provide. If you leave the expected grace period end date blank on your consolidation application, your Direct Consolidation Loan will enter repayment immediately and you will lose the remaining portion of the grace period on the loans you are consolidating.
You can select a date up to nine (9) months into the future. If your grace end date is more than 9 months away, wait to submit your application.
14. Should I rehabilitate before consolidating my defaulted loan?
There are many benefits to rehabilitating a defaulted loan before consolidation. If you consolidate a defaulted loan without rehabilitating it. your credit record continues to show a default status on the loan. This is true even after the consolidation loan pays off the defaulted loan in full.
- Consolidating a defaulted loan will result in your credit report bearing the notation that the loan was in default but then "paid in full." This notation will remain on the credit report for up to seven years. While a "paid in full" notation is preferable to an unpaid default, there is still the possibility that lenders will deny you future credit, such as mortgages, auto loans, or credit cards because of this notation.
However, if you rehabilitate a defaulted loan before consolidating it. the loan holder will update your credit record to no longer reflect the default status of the rehabilitated loan(s).
- Rehabilitating a defaulted Direct Loan or FFEL loan requires that you make at least nine (9) full payments of an agreed amount within twenty (20) days of their monthly due dates over a ten (10) consecutive month period. Rehabilitating a defaulted Perkins loan requires nine (9) on-time monthly payments. Contact your loan holder to obtain additional rehabilitation terms and conditions for your loan type.
Keep in mind that if you default on your loan, you are liable for any collection costs incurred to collect the loan. If you pay off the defaulted loan by taking out a Consolidation Loan, the amount you borrow must be enough to pay off your defaulted loan, including principal, interest, and collection costs. This means that the amount of the new loan may need to be up to 18.5% larger than the principal and interest outstanding on your defaulted loan.
Both rehabilitation and consolidation will reinstate your eligibility for additional Federal student aid under Title IV of the Higher Education Act (Pell Grants, Direct Loans, etc.)
15. What are the consequences of defaulting?
Borrowers who fail to make a payment on time are considered delinquent on their Direct Consolidation Loans. Borrowers who do not make payments for 270 days are in default. Defaulting has severe and long-lasting consequences, as follows:
- The Department of Education can immediately demand repayment of the total loan amount due.
- The Department of Education will attempt to collect the debt and may charge collection costs .
- The Department of Education reports defaulted loans to national credit bureaus, damaging borrowers’ credit ratings and, making it difficult for borrowers to make purchases such as cars or homes.
- Borrowers with loans in default are ineligible for Title IV student aid.
- Borrowers with loans in default are ineligible for deferments
- The Internal Revenue Service can withhold borrowers’ Federal income tax refunds.
- Borrowers' wages may be garnished.
It is important that borrowers with Direct Consolidation Loans stay in touch with your Federal Loan Servicer. Default can occur when borrowers fail to keep their Federal Loan Servicer up to date on address and name changes, causing billing statements to go astray. In addition, your Federal Loan Servicer can offer alternatives when borrowers have trouble making monthly payments. Borrowers may apply for a deferment or forbearance, or change repayment plans.
16. What are the repayment plans?
When repaying a Direct Consolidation Loan, you may choose from multiple repayment plans with various terms.
Your monthly payments will be based on annual income and family size, and spread over a term of up to 25 years. You must be experiencing a partial financial hardship to initially select the IBR plan and to continue making income-based payments under this plan.
If you consolidate more than one loan type (subsidized, unsubsidized and PLUS) you will have one Direct Consolidation Loan with up to two parts: Direct Subsidized and Direct Unsubsidized (which includes PLUS) Consolidation Loans. Even with up to two parts of each Direct Consolidation Loan, you make only one payment each month.
If you have not chosen a repayment plan, are not required to pay using ICR or IBR, and we determine that you currently have other Direct Loans, we may assign your new Direct Consolidation Loan(s) to the same repayment plan as your active loan(s). If you do not currently have
Direct Loan(s), we may assign your new Direct Consolidation Loan(s) to the Consolidation Standard Repayment Plan. You can change at a later date to other plans for which you may be eligible.
If at any time you are unable to make the payments, you may request a deferment to temporarily suspend your monthly loan payments or a temporary forbearance to postpone payments.
Standard Repayment Plan
Under this plan, you will pay a fixed amount of at least $50 each month for up to 10 to 30 years, based on your total education indebtedness. This plan may result in lower total interest paid when compared to repayment under one of the graduated plans.(See Example A and the Standard and Graduated Repayment Plan Repayment Periods Table )
This example shows a Direct Consolidation Loan repaid at an 8.25 percent interest rate under the Standard Repayment Plan for 15 years (180 payments).