Student Loan Consolidation - Ways to Shrink Student Debt

Consolidate Your Student Loans

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Loan consolidation is the process of combining one or more eligible student educational loans with individual payments and interest rates into a single consolidation loan with one payment and one interest rate. The following Q&A answers some of the general questions about Direct Consolidation Loans and can help you to decide whether it might be an option for you.

How Does Direct Loan Consolidation Work?

  • You must have at least one student loan--Direct Loan or Federal Family Education Loan--to apply for a Direct Consolidation Loan.
  • Student loans eligible for consolidation must be in one of the following statuses--in grace (period between leaving school and beginning repayment), in deferment, in repayment or in default.
  • A Direct Consolidation Loan has a fixed interest rate that cannot be more than 8.25 percent. The interest rate of your consolidation loan is a weighted average of the interest rates of all of the student loans you include in consolidation.
  • Once your Direct Consolidation Loan has been processed, you make one payment on the consolidation loan rather than individual payments on each student loan.

Is Direct Loan Consolidation a Good Idea for Everyone?

Not necessarily. A consolidation loan might be appropriate for you if you:

  • Are having trouble keeping up with different student loan payments and need a more consolidated method
  • Have no more deferment or forbearance options remaining
  • Fear that you may go into default on your student loans
  • Have variable interest rates on your student loans and would like to have a fixed rate

Because a Direct Loan Consolidation extends the length of time for your repayment, you pay more interest. If you only have a short time left to pay off your student loans, a consolidation loan may not be a sensible option for you.

What Other Benefits Does a Direct Loan Consolidation Offer?

Benefits of a Direct Loan Consolidation can include a lower monthly payment, renewed deferment options and a variety of repayment plans to fit your personal financial circumstances:

  • Standard Repayment Plan: You pay a fixed amount each month until your consolidation loan is paid. Repayment can be from 10 to 30 years depending on the total loan amount.
  • Graduated Repayment Plan: As your income increases, your monthly consolidation loan repayment amount increases every two years. Repayment is from 10 to 30 years depending on total loan amount.
  • Extended Repayment Plan: For consolidation loan amounts greater than $30,000, repayment can take up to 25 years with either a fixed or graduated payment option.
  • Income Contingent Repayment Plan: Monthly payments are based on annual income, family size and how much you owe on your consolidation loan. You can have up to 25 years to pay.
  • Income-Based Repayment Plan: Monthly payments are also based on annual income and family size, with up to 25 years to pay. This plan is for those experiencing a partial financial hardship.

A Direct Loan Consolidation could be a fitting option for students with multiple educational loans. The Direct Consolidation Loan website has more detailed information that can help you decide whether it's the right kind of choice for you.