There are many kinds of loans offered by the federal government. One of these is a Direct Consolidation Loan. While most kinds of student loans are taken out before you attend school, a Direct Consolidation Loan is something you apply for after you’ve been in school or have already graduated with your degree.
The key word here is “consolidation,” which is a popular practice done with many forms of debt. Consolidating federal loans can potentially be a great option for borrowers in certain situations. Let’s look at how a Direct Consolidation Loan works.
How Does a Direct Consolidation Loan Work?
As already mentioned, the operative word to think about here is “consolidation.” This is a process of taking multiple loans and combining them together into a single new loan—otherwise known as consolidating them.
There are a few reasons why it can make sense for consumers to opt for a Direct Consolidation Loan with the Department on Education. For starters, it’s free to apply for a Direct Consolidation Loan. For those who are currently struggling to make ends meet due to their high student loan payments, the ability to consolidate without a fee can be a huge benefit.
This, however, isn’t the main reason why people opt for a Direct Consolidation Loan. When you consolidate your student loans, you bring multiple loans together into one. Doing this makes your debt repayment much less complicated, as you only have to think about one bill each month instead of many.
Furthermore, consolidating your loans this way can allow you to change the repayment period of your loan. Individuals who are having a hard time making their monthly payment can extend their repayment term, which will lower the amount you have to pay each month.
Are There Other Options Besides Direct Consolidation Loans?
While Direct Consolidation Loans can be a good option for many people, they have some drawbacks as well. For starters, you can’t lower your interest rates when you consolidate loans through the federal government. This means that extending your repayment will lead to you having to pay back more over time, since interest will be accumulating for longer.
Additionally, consolidating loans has a hidden cost built into it. When you combine your loans, the outstanding interest doesn’t go away. Instead, it’s just added onto the principal balance of the new loan. Therefore, consolidating with the federal government can actually lead to your loans ballooning up even more. It’s also possible you might lose some of your federal loan benefits when you consolidate—such as income-driven repayment plans—despite the new loans still originating with the federal government.
Borrowers who want to seek out different options can consider a student loan refinance. While there are also pros and cons to this, it might be a better solution for you if a Direct Consolidation Loan just doesn’t seem quite right. But what is refinancing, and how does it affect your ability to repay your debt?
A student loan refinance is simply taking out a new loan that completely replaces an old one. This allows you to get a lower interest rate on your debt, or change the repayment term. Refinancing is a super common practice among borrowers of all kinds, so it’s not something you have to be suspicious of like debt relief.
At the same time, student loan refinancing is only available through private lenders. This means you’ll have to meet certain borrowing requirements—such as a minimum credit score and income level. Furthermore, you will lose federal student loan protections and benefits if you refinance. However, if you already have a private loan, there’s no reason not to do this if you can get a better interest rate, since refinancing is free. Many with federal loans will also find that refinancing can provide a better path forward if they want to lower their interest rates and are confident in their ability to pay off their debt.
Direct Consolidation Loans from the Department of Education are a great way for certain borrowers to simplify their debt repayment. It’s also important to remember, though, that this isn’t a perfect solution and won’t be right for everyone.