How to consolidate student loans into direct loan program

August 9, 2022 |6 min read

Student loan debt can feel overwhelming—especially if you have multiple student loans to manage. One option for managing the debt is to consolidate your loans. 

So how does student loan consolidation work, and what do you need to know? Read on to find out what it is, why you might want to consider consolidating your loans and the differences between federal student loans and private student loans.

Key Takeaways

• Student loan consolidation is a process that combines multiple loans into one new loan with a single payment made monthly to one loan servicer.
• Only federal student loans are eligible for the federal consolidation program. Private lenders may offer their own consolidation or refinancing options.
• There’s no fee associated with a federal Direct Consolidation Loan, and your credit score isn’t impacted.

What Is Student Loan Consolidation?

Student loan consolidation is a process that combines multiple student loans into one new loan to help you reduce the number of payments you have to make each month. This process might give you a chance to lower your monthly payment and/or interest rate.

There might be drawbacks though. According to the Department of Education, you could lose some benefits. You could also end up increasing the total amount you owe or extending how long it takes to pay off everything.

Federal Student Loan Consolidation

You can consolidate many federal loans with a Direct Consolidation Loan. This could help you lower the number of loan payments you have to make each month and reduce your monthly payment by extending your loan term. It can even help you qualify for certain repayment or forgiveness plans. 

Private Student Loan Consolidation

If you have private student loans or a mix of federal and private, you can’t consolidate them through the federal program. But you might be able to combine them through a private lender or bank. 

Private student loan consolidation might not offer interest rates as low as a federal program would. But your rate for a new private consolidated loan may still be lower than your previous loan rates if your credit score has improved. Remember to continue making payments towards any student credit cards.

Keep in mind that if you’re consolidating federal and private student loans, you could lose access to any benefits of the federal loans, like federal repayment plans and deferment programs.

3 Steps to Consolidate Federal Student Loans

Here are some steps you may want to take when consolidating federal student loans.

1. Check if You Qualify

Some of the requirements for federal student loan consolidation include:

• Your loans must currently be in repayment.
• Your loans must not have been previously consolidated. 
• If your loan is in default, you’ll typically need to have made a certain number of payments in a row or be enrolled in an eligible repayment plan.
• You must have graduated, left school or fallen below half-time enrollment.

2. Apply for a Direct Consolidation Loan

You can apply for federal loan consolidation directly through the Federal Student Aid website. You’ll need to complete the federal Direct Consolidation Loan application and a promissory note. The promissory note is a legal document of your agreement to repay the lender. 

3. Use Your Loan to Pay Off Existing Student Loans

If you’re approved for a Direct Consolidation Loan, you can use this to pay off your original loans. Each month, you can make one payment instead of several with a fixed interest rate until the loan is paid off. You can expect to start repayment for your Direct Consolidation Loan 60 days after it has been paid out.

3 Steps to Consolidate Private Student Loans

Here are some steps you may want to take when consolidating your loans through a private lender.

1. Find a Private Consolidation Lender

It’s possible that your current lender may offer a consolidation option. If so, you could choose to consolidate with the same lender or shop around for another. 

2. Check if You Qualify

Some of the requirements for private student loan consolidation could include:

• You’re making payments on private student loans.
• You have a good-to-excellent credit score.
• You can provide proof of income.

If you meet the criteria, you can complete and submit an application.

3. Use Your Loan to Pay Off Existing Student Loans

If you’re approved, you can use your new loan to pay off your existing loans. Then you can begin making one consolidated monthly payment on the new loan.

Should I Consolidate My Student Loans?

Whether student loan consolidation is right for you depends on your situation. Here are some things to bear in mind:

Pros

• A single loan can simplify the loan repayment process with just one monthly bill.
• You could lower your monthly payments by extending your repayment term.
• A federal loan consolidation may qualify you for several repayment plans or Public Service Loan Forgiveness.
• You might be able to lower your interest rate.

Cons

• You can only consolidate federal student loans into a federal Direct Consolidation Loan.
• If you’re consolidating federal and private student loans, you could lose access to any benefits of the federal loans, like lower interest rates and federal repayment plans and deferment programs.
• Lowering your monthly payments could extend your repayment term and mean you end up paying more interest.
• You can only consolidate your federal student loans once.

FAQs About Consolidating Student Loans

Here are some answers to a few of the most common questions about the process of consolidating student loans.

How Long Does It Take to Consolidate Student Loans?

If your application is accepted, the process to receive your loan could take about 30 to 45 days.

How Much Does It Cost to Consolidate Student Loans?

There’s no fee associated with a federal Direct Consolidation Loan. For a fee, some private lenders will complete the application for you. Or you can do it for free yourself. If you’re trying to consolidate loans through private lenders, check with them about fees.

Will Consolidating My Student Loans Affect My Credit?

Federal student loan consolidation doesn’t require a hard inquiry, so the application won’t affect your credit. 

Applying to consolidate your student loans through a private lender will trigger a hard inquiry, like any application for credit. That will show up on your credit report and can cause a dip in your credit score, though probably not a large one. 

Experts advise against applying for too much credit in a short time period. Doing so could result in multiple hard inquiries on your credit reports and could negatively affect your credit scores. 

And remember, in the long term, the effect of the loan consolidation on your credit depends on your responsible use of your new loan.  

What Is the Average Interest Rate on Consolidated Student Loans?

Currently, there’s a payment pause on federal student loans, and the government has set interest rates at 0%. 

But typically, the interest rate is determined by calculating the weighted average interest rate of all the loans being consolidated. That number is then rounded up to the nearest one-eighth of a percentage. This could mean that your new interest rate ends up lower than your current one. It will also be fixed over the lifetime of the loan.

Student Loan Consolidation in a Nutshell

Consolidating your student loans can be an effective way to better manage your monthly loan payments and possibly lower your interest rate or payments. But it may not be right for everyone. It’s a good idea to take some time considering the pros and cons and looking into other strategies for paying off student loans before you make a decision.

Can you consolidate student loans into one loan?

Can I consolidate private student loans into direct loans?

What is a direct consolidation student loan?

Can my student loans be forgiven if I consolidate?