However, a Federal Direct Consolidation Loan can stretch out payments over a longer repayment period in some cases.
More important, though, a Federal Direct Consolidation Loan can render the student loan borrower eligible for several flexible repayment programs only available for certain Federal student loans.
In fact, old Federal student loans (under the prior Federal Family Education Loan [FFEL] program) can even be consolidated into new Federal loans eligible for (more) flexible repayment and potential forgiveness, under the Federal Direct Consolidation Loan program.
Unfortunately, though, students who refinance old (or new) Federal student loans a private loan lose access to all of the flexible repayment and potential forgiveness programs.
Any excess interest is capitalized, with no maximum limit on negative amortization, but any remaining balance is forgiven after 25 years (this was reduced to 20 years and a 10%-of-income cap for recent borrowers since July 1, 2014).
To qualify for IBR, the borrower must have a “partial financial hardship” (in addition to otherwise being eligible).– Pay As Your Earn (PAYE).
The Federal Direct Consolidation Loan combines together multiple Federal student loans into a single loan.
This process of consolidation does actually change the interest rate being charged (aside from a miniscule adjustment that may occur because the consolidated rate is recalculated as the weighted average interest rate of all the individual loans being consolidated rounded to the nearest 1/8).
Unlike PAYE, though, negatively amortizing interest charges with REPAYE only accrue at 50% of the unpaid interest, and only capitalize if you leave the REPAYE program.– Public Student Loan Forgiveness (PSLF).
Refinancing multiple loans into a single consolidated one can also be appealing if the new loan has a longer repayment period, which may significantly reduce minimum debt payment obligations and make it easier to avoid default (though obviously, making smaller payments will also lead to more cumulative loan interest being paid over time).
Debt consolidation and refinancing strategies are often appealing to consider because most debt itself is otherwise fungible – a debt is a debt, interest is interest, and a payment obligation is a payment obligation – so if restructuring existing loans into a new one provides an opportunity for some combination of better loan terms (interest rates, repayment periods, etc.), so much the better.
Sometimes it’s to reduce the monthly payment requirements by stretching them out of a longer repayment period.
And in some cases, it’s just for the administrative ease and simplification of being able to make all the payments to one loan servicer.