Direct Consolidation Loan: Definition and What It Is
A Direct Consolidation Loan is a federal loan issued by the Department of Education that pays off multiple existing federal student loans and replaces them with a single new loan. The new loan carries a fixed interest rate equal to the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of a percent. The repayment term on the consolidated loan is typically longer than the original loans, which lowers the monthly payment but increases total interest paid.
Direct Consolidation is available only for federal loans. Private loans cannot be included. Borrowers apply through StudentAid.gov and choose a repayment plan at the time of consolidation. The process takes 30 to 60 days on average.
Why it Matters
Consolidation simplifies repayment by replacing multiple payments with one. It can also make certain loan types eligible for repayment plans and forgiveness programs they would not otherwise qualify for. Borrowers with older FFEL loans, for example, can consolidate them into a Direct Loan to become eligible for income-driven repayment options tied to the Direct program.
For borrowers in default on federal loans, consolidation can also be a path to exiting default, provided the borrower agrees to repay under an income-driven plan. However, consolidation of a defaulted loan does not remove the default from the credit report the way rehabilitation does. The consolidation options article on Yrefy's blog walks through when private student loan consolidation makes sense, and when rehabilitation might be the better choice.
Example
A borrower has five federal loans from three different servicers with rates ranging from 4.5% to 6.8%. They apply for a Direct Consolidation Loan. The weighted average rate comes to 5.7%, rounded to 5.75%. The consolidated loan has a single servicer and a single monthly payment. The repayment term is extended to 25 years, which reduces the monthly payment but increases total interest paid significantly compared to the original terms.
