During rehabilitation, you can consolidate your federally subsidized loans into a Direct Consolidation Loan (Direct Loan) or Special Direct Loan.
The advantage of consolidation is that it replaces all of your old loans with one new loan for making payments. It also takes your loans out of default, stops all future wage garnishment and tax intercepts, and even helps your credit history. Finally, if you make 6 monthly payments in a row, you can get new student loans if you go back to school.
Once you consolidate your loans into the Direct Loan program, you can make payments based on your income and the amount of your student loan debt as part of the Income Contingent Repayment plan. Another program known as the Income Based Repayment plan lets you make payments based on your income and family size. Under either repayment plan, your remaining student loan debt is discharged (forgiven) after 25 years.
If you have both government-held and privately-held subsidized loans, you may qualify for the Special Direct Loan program. If you qualify for the Special Direct Loan program, you should receive application information from a servicers.
If you learn that you qualify for a Special Direct Loan, do not consolidate into a Direct Loan. A Direct Loan consolidation cannot be transformed into a Special Direct Loan, and the interest rates on a Special Direct Loan will probably be better.
You can consolidate your loans even if you only have one student loan. Also, if you apply for a consolidation, you can qualify for the Income Contingent Repayment Plan (ICRP). This means your new loan payments will be based on your annual income.
If your income is below the federal poverty level, you will not be required to make any monthly payments on the loans. Loans with ICRP payments are cancelled after 25 years. To apply for consolidation, call the United States Department of Education at 1-800-557-7392 or you can apply on the Federal Student Aid website.
Updated: June 2017