While all new federal loans now come through the Direct Loan program administerd by the Department of Education, nearly 6 million borrowers currently make more than one monthly payment because they have both Direct Loans and an older form of loan known as Federal Family Education Loans (FFEL).
Starting in January, borrowers can consolidate and make one monthly payment through the Direct Loan program. By taking advantage of this limited-time offer, they could get a 0.25 percent interest reduction on their FFEL loans and another 0.25 percent savings on their entire consolidated balance.
The Obama administration hopes this will reduce defaults, since making multiple payments to different servicers is sometimes a contributing factor in defaults.
This move will also save the administration money because it will have to pay less to servicers of FFEL. It will use those savings to pay for the accelerated income caps and loan forgiveness provisions, an Education Department spokesman says.