How Does Consolidating Student Loans Affect Your Credit?

With the price of higher education skyrocketing and many students left struggling with multiple loans, it’s no surprise that more and more college graduates are trying to consolidate debt. By reducing federal or private student loans into one loan with good terms and a low-interest rate, students can save money and make their lives less complicated. Rather than paying multiple payments each month, debt consolidation allows graduates to pinpoint their repayment on a single loan they can afford.

Debt consolidation is available more readily and more conveniently than ever. Unsurprisingly, many students worry about the short-term and long-term impact of debt consolidation, mostly because it entails taking out yet another loan.

We created this directory to answer questions and outline the process of debt consolidation. If you’re considering consolidating either federal or private student loans and considering how it might affect your credit, keep reading to learn more.

Will Consolidating My Student Loans Benefit My Credit Score?

Because of how the bureaus calculate your credit score, there’s hope that debt consolidation could actually help your credit score.

When you consolidate several loans into one new loan with a lower interest rate and better terms, you can often get a lower monthly payment. A lower monthly payment will not only make it easier to pay your loan bills on time each month, but it will also lower your debt-to-income ratio too. When your debts eat up a smaller percentage of your income every month, you become a more desirable prospect to creditors and may see a boost in your score as a result.

Lastly, lenders view student loans as debt that is desirable. They consider them to be installment loans, whereas credit cards involve a revolving line of credit. Since the bureaus calculate your credit score by considering factors like your “credit mix,” varying your credit with different types of loans can lead to a better credit score over time.

Does Consolidating Student Loans Hurt Your Credit?

Although consolidating student loan debt can improve one’s credit, the opposite is possible too – at least at first. Because debt consolidation means taking a new loan, your loan provider will do a “hard pull” on your credit report. This hard pull lets them assess your creditworthiness, but it may cause a temporary lowering of your credit score.

On the bright side, any temporary effect on your credit score caused by a hard inquiry will be short. In usual circumstances, the detrimental effect only lasts a few months. Typically, the pluses of consolidating student loans far outweigh the minuses. You should consider your situation and weigh the pros and cons before you decide.

Federal Student Loan Consolidation vs. Private Student Loan Consolidation

Now, you’re probably wondering whether consolidating your student loans makes sense. Is it really going to help you save money? Pay down debt faster? Improve your credit score?

In the end, the answer to these questions relies on your specific situation, your credit history and score, and how much debt you have.

It’s critical to differentiate between federal loan consolidation and private loan consolidation. With federal loan consolidation, the federal government will consolidate your loans with a Direct Consolidation Loan. These loans allow you to combine most federal student loans into a new loan with a lower payment. The lower monthly payment is usually because of extending the repayment end-date. You’ll pay less toward your loan balance each time, but for longer than you usually would.

The downside to the Direct Consolidation Loan is that they usually do not help you save money on interest. That’s because federal student loans are consolidated by weighing up the average of your current interest rates, rounded up to the nearest eighth of a percent.

It’s also important to note that consolidating federal student loans into a Direct Consolidation Loan might cause you to lose critical beneficial features like income-driven repayment, interest rate discounts, principal rebates, and more.

Private student loan consolidation works differently from federal student loan consolidation because you choose private student loan lenders. You can not only lower your monthly payment by extending your repayment timeline, but you might secure a lower interest rate and save money on interest, too.

Like federally-sponsored loan consolidation, though, you may lose loan benefits if you consolidate or refinance your student loans with a private lender. Make sure to research the pluses and minuses before choosing this way, and be sure the benefits outweigh any lost protections or perks.

Is a Student Loan Consolidation Program My Best Option?

If you’re pondering student loan consolidation but can’t make up your mind, it’s imperative to understand which type of circumstances make debt consolidation a wise move. Here are some situations when student loan consolidation makes a lot of sense:

You Might Want to Think About a Student Loan Consolidation if:

• You want to make your life simpler with a single monthly payment. If you’re tired of managing several loan payments at once, debt consolidation makes sense. After you consolidate, you’ll have a single loan payment to make each month.
• Your interest rate will be lower with a private lender. If your student loans are high-interest rates and you think you can get better, you might save money by getting a new loan with a lower interest rate. 
• You want to lower your monthly amount. If the monthly installment on your loans is too high at present, debt consolidation can help. Usually, you can lower your payment by extending your timeline for repayment. Bear in mind, however, that you might pay more interest the longer you extend your credit – even if your interest rate is lower.
• You want to pay off your loans faster. Even though debt consolidation doesn’t ensure early repayment, it can make the process easier. With a single monthly payment to worry about, it might be easier to focus on repayment and come up with extra money to pay toward your loan principal each time. You may be able to pay off your loans incredibly quickly if you get a lower interest rate, too.

Is student loan consolidation the best choice for you? Only you can say, but it will take a little work to get started. By assessing your needs and wants, crunching the numbers, and getting free quotes, you could be on your way to a more affordable (and convenient) student loan in no time.

Before You Graduate or Leave School

Review your federal loan history. Get your loan history by logging in to “My Federal Student Aid”—you will have to create an FSA ID if you haven’t already. Review your information and note the following:

• Current balance and interest rate for each loan
• Loan type 
• Name of the loan servicer for each loan (a loan servicer is a company that manages the billing and other services on your loans)

After You Graduate or Leave School

When will you have to start making payments? 

Most loans you have six months—or nine months for Federal Perkins Loans—after you graduate, leave school, or drop below half-time before you have to start your payments. Make a repayment plan.

Make a Budget

Create a budget to decide how much you can pay each month toward your student loans. Get help creating a budget.

Think About Loan Consolidation

A Direct Consolidation Loan lets you combine all of your federal student loans into a single loan with one payment per month. Loan consolidation helps if you have multiple debts, loans from the Federal Family Education Loan (FFEL) Program, or Federal Perkins Loans. Loan consolidation can increase your odds of qualifying for a repayment plan and loan forgiveness, but it might not be the best option for you.

Set Your Goal for Repayment

After you have calculated how much you can pay each month, set a goal for repaying the loans. To start developing your goal, ask/answer this question: “Do I want to pay my loans fast, or do I want as low of payments as possible per month?” You can’t choose both. Any time you lower your payment, you’ll be in repayment for longer, and you’ll pay more interest.

If your situation changes, you can change your plan at any time.

Choose an Affordable Payment Plan

Once you’ve set a goal for repayment, you can find a repayment plan that’s right for you by using Loan Simulator.

• If you want to pay your loans off fast and you can do it, select the Standard Repayment Plan. Unless you consolidate, you can pay off your loans in 10 years of payments.
• If you want to have a low monthly payment or can’t make payments under the Standard Repayment Plan, select an income-driven payment plan.
• As a percentage of your income, these plans set your payment, usually have a lower monthly payment, and maybe as low as $0.

You’ll be in repayment for up to 20 or 25 years with these plans. If you don’t repay loans after 20 or 25 years, lenders will forgive the remaining balance. 

If you don’t select a specific plan, your loan will default to the Standard Repayment Plan. You can change to a different option by contacting your loan servicer.

Find out if You’re Eligible for Loan Forgiveness Based on Your Employer or Your Job

• Public Service Loan Forgiveness (PSLF) Program: You might qualify for this forgiveness program if you work for a government or a not-for-profit organization.
• Teacher Loan Forgiveness Program: You might qualify for this program if you (a) teach full-time for five academic years in specific elementary and secondary schools that serve low-income families and (b) meet other qualifications.

Find out more about forgiveness, cancellation, and discharge.

Teachers might qualify for both forgiveness programs (PSLF and TLF)—but not for the same time period.

When It’s Time to Start Making Payments

Make on-Time Payments

Your loan provider will give you a loan repayment schedule showing when your first payment is due.

Make Paying Simple and Save on Interest—register for Automatic Debit.

After you enroll, your automatic payments are taken from your bank account each month. This way, you can be on schedule with your payments, and as a side benefit, you may get a 0.25% interest rate deduction if you have Direct Loans. 

If You Can’t Make Your Loan Payment Know Your Options

If you can’t pay the full amount on time or start missing payments, your loan will be considered delinquent, and the lender will charge late fees to you. Get information about what to do if you are having trouble making your payments.

Cut Your Federal Income Taxes

You might be eligible to deduct a part of the student loan interest you pay on your federal tax return.