Do consolidation loans need to be repaid?

The repayment of a direct consolidation loan will begin within 60 days after the loan is disbursed (repaid). Your loan servicer will let you know when your first payment is due. All borrowers who consolidate on a direct consolidation loan can take advantage of the emergency student loan payment pause caused by COVID-19.Debt consolidation involves bundling several debts into a single loan with a monthly payment and, hopefully, a lower interest rate. This can help you stay organized and possibly save money, especially when you have a lot of debt and don't seem to be making progress in paying what you owe.

Debt consolidation means that your various debts, whether they are credit card bills or other loan payments, are bundled into a single loan or monthly payment. If you have multiple credit card or loan accounts, consolidation can be a way to simplify or reduce payments. Keep in mind that using your capital to get a loan could put you at risk of running “out of money” in your home if the value of your home falls. Understand how they work and evaluate the benefits and drawbacks of these loan products before deciding if they make financial sense for you.

Direct consolidation allows delinquent borrowers to make three consecutive reasonable and affordable monthly payments or to agree to pay under income-based amortization. If you use the accumulated value of your home to consolidate your credit card debt, it may not be available in case of emergency or for expenses such as renovations or home repairs. So, if you have three credit cards with different interest rates and minimum payments, you could use a debt consolidation loan to pay off those cards, allowing you to manage just one monthly payment instead of three. If your credit score is on the low end, it's highly unlikely that you'll qualify for a debt consolidation loan with a lower interest rate than you currently have.

Whether you're up to date on your loans or are in default, you should consider the pros and cons of consolidation before starting the process. Despite what a collector tells you, if you select income-based payment, you don't have to make three payments before requesting consolidation. If you can qualify for a low interest rate, a debt consolidation loan can streamline the process of getting rid of your debt while saving you money. There are several ways to consolidate or combine your debt into one payment, but there are a number of important things to consider before moving forward with a debt consolidation loan.

Most debt consolidation loans are fixed-rate installment loans, meaning that the interest rate never changes and you make a predictable payment every month. Many companies that advertise consolidation services may actually be debt settlement companies, which often charge upfront fees in exchange for promising to pay off your debts. PLUS borrowing parents who also have other federal student loans and choose to consolidate them with Direct will find that the PLUS loan contaminates the entire consolidation loan and will mean that they will not be able to repay the consolidation loan through IBR.

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