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All About Government Debt Consolidation Loans

All About Government Debt Consolidation Loans
Mark Cappel
UpdatedApr 11, 2024
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    6 min read
Key Takeaways:
  • Federal student loans? Check out the Special Direct Consolidation Loan.
  • You can consolidate most federal student loans in a Direct Consolidation Loan.

Save Time With a Government Debt Consolidation Loan

The Dept. of Education offers several types of student loan debt consolidation loans. The first we discuss is called the Special Direct Consolidation Loan, which was announced in January 2012, and expires on June 30, 2012. The other is a long-term Dept. of Education plan to consolidate a wide array of subsidized and unsubsidized federal student loans.

A quick note before we dive into the specifics of both programs: If you seek a government debt consolidation loan for a credit card debt, we do not have good news for you. In general, the federal government does not offer loans or grants to pay for credit card debt. However, if you are disabled or unemployed, you may be eligible for government benefits. See, a collaborative effort of 17 federal agencies to provide a source of information to help people understand which benefit programs they may be eligible for and how to apply.

Quick Tip

Get a no-cost, no obligation analysis of your debt options from a pre-screened debt relief provider.

Special Direct Consolidation Loans

According to the Dept. of Education, Special Direct Consolidation Loans are intended to help borrowers manage their debt by ensuring all of their federal loans are serviced by the same organization. The consolidation creates one bill and one payment and a .25% cut in their interest rate. The maximum interest rate a borrower who refinances will pay is 8.25%.

The Special Direct Consolidation Loans program ends June 30, 2012, and is open for borrowers who have at least one:

  1. Student loan held by the Dept. of Education. This loan must be a Direct Loan or a Federal Family Education Loan (FFEL) owned by the Dept. of Education and serviced by one of the Dept. of Education's servicers; and
  2. Commercially held FFEL loan. This loan must be a FFEL loan owned by a FFEL lender and serviced either by that lender or by a servicer contracted by that lender.

You must have on eligible loans that is current or less than 270 days delinquent. If you are more than 270-days delinquent, you can qualify if you make your loan current or less than 270 days delinquent. In other words, eligible loans must be in grace, repayment, deferment, or forbearance.

The Dept. of Education says the following commercially held FFEL loans are eligible for the special program:

  • FFEL Subsidized and Unsubsidized Stafford Loans
  • FFEL PLUS Loans borrowed by graduate or professional students and PLUS Loans borrowed by a parent for an undergraduate student
  • FFEL Consolidation Loans

That covers many loans. But many other student loan types are not eligible, according to the Dept. of Education, including:

  • Direct Loans
  • FFEL loans owned by the Dept. of Education and serviced by one of the Dept. of Education's servicers
  • Commercially held FFEL loans in an in-school status
  • Commercially held FFEL loans in default or subject to a bankruptcy proceeding
  • Perkins Loans
  • Health Education Assistance Loans (HEAL), Health Professions Student Loans (HPSL), Nursing Student Loans (NSL), Loans for Disadvantaged Students (LDS)
  • Private student loans

To learn if you meet the eligibility requirements, the Dept. of Education states you should follow these steps:

  1. Go to
  2. Log on by entering your Federal Student Aid PIN and other identifiers.
  3. Look for a message in the Alerts box on the top right side of the page. A special alert will state whether you are eligible.

If you do not know your PIN, go to

Dept. of Education Direct Consolidation Loan

A traditional Direct Consolidation Loan allows borrowers to include all eligible federal loans in a consolidation. The advantages of a Direct Consolidation loan are:

  1. You may save money due to a reduced interest rate
  2. The Dept. of Education does not charge a fee for a consolidation
  3. You make one consolidated payment instead of several

The following table compares a Direct Consolidation Loan and the Special Direct Consolidation Loan. Note that if you qualify for a Special Direct Consolidation Loan, you should start this application process before attempting a Direct Consolidation Loan. Do not start the traditional Direct Consolidation Loan process if you believe you qualify for the Special Direct Consolidation Loan.

Traditional Direct Consolidation LoanSpecial Direct Consolidation Loan
Repayment TermThe repayment term for the loan starts over, giving students longer to repay their loan. A longer repayment term may result in lower monthly payments but will ultimately increase the amount the borrower will pay over the life of the loan since more interest will accrue during a longer repayment period.Each loan that is consolidated retains its original repayment term. As a result, borrowers will pay less interest over the life of the loan than they would under the traditional consolidation program.
Interest RateA single fixed rate based on the weighted average of the interest rates of those loans being consolidated rounded up to the nearest one-eighth of 1%, not to exceed 8.25%.If more than one loan is consolidated, different parts of the consolidation loan may have different interest rates. The interest rate of each commercially-held FFEL loan that is consolidated will be fixed at the current rate on that loan as of the date of consolidation, reduced by 0.25% (not to exceed 8.25%).
Automatic Debit BenefitEligible for a 0.25% interest rate reduction if the loan is repaid through the servicer’s automatic debit system.Eligible for a 0.25% interest rate reduction (in addition to the 0.25% reduction for consolidating) if the loan is repaid through the servicer's automatic debit system.

Source: Dept. of Education

The following loans can be included in a Direct Consolidation Loan:

Subsidized Loans

  • Subsidized Federal Stafford Loans
  • Direct Subsidized Loans
  • Subsidized Federal Consolidation Loans
  • Direct Subsidized Consolidation Loans
  • Federal Insured Student Loans (FISL)
  • Guaranteed Student Loans (GSL)

Unsubsidized Loans

  • Unsubsidized and Nonsubsidized Federal Stafford Loans
  • Direct Unsubsidized Loans, including Direct Unsubsidized Loans (TEACH) (converted from TEACH Grants)
  • Unsubsidized Federal Consolidation Loans
  • Direct Unsubsidized Consolidation Loans
  • Federal PLUS Loans (for parents or for graduate and professional students)
  • Direct PLUS Loans (for parents or for graduate and professional students)
  • Direct PLUS Consolidation Loans
  • Federal Perkins Loans
  • National Direct Student Loans (NDSL)
  • National Defense Student Loans (NDSL)
  • Federal Supplemental Loans for Students (SLS)
  • Parent Loans for Undergraduate Students (PLUS)
  • Auxiliary Loans to Assist Students (ALAS)
  • Health Professions Student Loans (HPSL)
  • Health Education Assistance Loans (HEAL)
  • Nursing Student Loans (NSL)
  • Loans for Disadvantaged Students (LDS)

Ineligible loans include:

  • Private loans
  • Primary Care Loans
  • Law Access Loans
  • Medical Assist Loans
  • PLATO Loans

If your loans qualify, apply online at the Dept. of Education's application page.


Federal student loan borrowers who refinance do not lose any of the flexible repayment options they have with their existing loans. In particular, deferment options, income-based repayment, and subsidy benefits remain. However, borrowers eligible for a grace period on FFEL Subsidized/Unsubsidized Stafford Loan or Direct Subsidized/Unsubsidized Loan lose the grace period by consolidating while they are in an in-school status. There are other deferment periods for certain PLUS loans that are lost in a consolidation. Check the fine-print on a consolidation before you commit yourself to the loan so that you understand any potential downsides.

Struggling with debt?

Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Housing debt totaled $12.612 trillion and non-housing debt was $4.891 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in West Virginia, 37% have any kind of debt in collections and the median debt in collections is $1459. Medical debt is common and 24% have that in collections. The median medical debt in collections is $553.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.