What Is a Direct Consolidation Loan?

A direct consolidation loan combines two or more federal education loans into a single loan. This loan comes with a fixed interest rate that is based on the weighted average of the rates of the consolidated loans. Combining debt through the direct consolidation loan program includes a free application for the borrower.

Understanding Direct Consolidation Loans

Direct consolidation loans allow borrowers to lower the number of loan payments they have to make each month by combining them into a single payment. Loans are managed by the U.S. Department of Education, and the application is free. Most federal loans are eligible for consolidation, but private loans are not. Borrowers can consolidate once they complete or withdraw from school or fall below half-time student status.

Borrowers who obtain a direct consolidation loan also access loan forgiveness options. Loan forgiveness programs allow borrowers to cancel their obligation to repay all or a portion of the remaining principal and interest owed on a student loan. Common forgiveness programs include the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness (PSLF) program. In most cases, student loan forgiveness is not considered taxable income and borrowers are not required to pay income tax on canceled or forgiven balances.

Direct Consolidation Loan Process

Direct consolidation loans are issued through the Federal Direct Student Loan Program. The Federal Direct Student Loan Program allows students and parents to borrow directly from the U.S. Department of Education.

Before consolidating, borrowers should consider benefits associated with the original loans, such as interest rate discounts and rebates. When the loans are rolled into a new direct consolidated loan, borrowers may lose benefits. Additionally, if the new loan increases the repayment period, the borrower will likely pay more interest.

After completing a free application, the borrower confirms the loans and agrees to repay the new direct consolidation loan. The borrower will have a single monthly payment on the new loan instead of multiple monthly payments on several loans.

Pros and Cons of a Direct Consolidation Loan

Pros Explained

Borrowers may be eligible for repayment terms of up to 30 years with one monthly payment. This makes it easier to keep track of a student loan balance. Direct consolidation loans have a fixed interest rate, and borrowers may access different repayment options.

The options include:

• A standard repayment plan
• A graduated repayment plan
• A extended repayment plan
• The Saving on a Valuable Education (SAVE) Plan 
• The Pay As You Earn (PAYE) Plan
• An Income-Based Repayment (IBR) Plan
• An Income-Contingent Repayment (ICR) Plan
• An Income-Sensitive Repayment Plan

Cons Explained

When loans are consolidated, the interest on the consolidated loan is based on a weighted average of the rates on their old loans, rounded to the nearest one-eighth of a percent (0.125%). The interest rate on a consolidated loan may be higher or lower than the average rates of the previous loans.

Because consolidation extends the repayment period, the borrower's monthly payment is lowered but may result in paying more money over the life of the loan. A direct consolidation loan does not come with a grace period. The repayment period starts immediately upon consolidation, with the first payment due in about 60 days.

Loan Forgiveness and Assistance

In August 2022, the Biden administration announced a plan to forgive up to $20,000 in student loan debt for borrowers who had received Pell Grants and $10,000 for other borrowers, at a total cost of $430 billion. However, the Supreme Court struck down this plan in June 2023. The court ruled the administration lacked the authority under existing federal law to cancel the debt.

In response to the decision, the White House unveiled the Saving on a Valuable Education (SAVE) Plan, a new income-driven repayment (IDR) option. Features of the plan include:

• Lowering monthly payments for undergraduate borrowers to 5% of discretionary income.
• Changing the discretionary income formula so that an estimated one million low-income borrowers qualify for monthly payments of $0.
• Halting the capitalization of unpaid interest, so that loan balances don’t grow as long as payments are kept current.
• Eliminating the need for a spouse to cosign an IDR application.

The Bottom Line

Borrowers who juggle multiple payments on many federal student loans may want to consider a direct consolidation loan. This program combines the loans into a single loan with a fixed interest rate. There's no credit check required, and borrowers don't have to pay an application fee. Information is available on the .