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How Does Consolidating Student Loans Affect Your Credit?

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With the costs of higher education surging and many students left juggling multiple loans, it’s no wonder that more and more college graduates are choosing to consolidate debt. By consolidating federal or private student loans into a single loan with excellent terms and a low interest rate, students are able to save money and simplify their lives. Instead of paying multiple payments each month, debt consolidation allows graduates to focus their repayment efforts on a single loan they can actually afford.

The good news is debt consolidation is more readily available – and more convenient – than ever. Unfortunately, many students worry about the short-term and long-term effects of debt consolidation, mostly because the process involves taking out yet another loan.

This guide was created to answer questions and demystify the process of debt consolidation. If you’re considering consolidating either federal or private student loans and worrying how it might affect your credit, keep reading to learn more.

Will consolidating my student loans help my credit?

First things first. Because of the way your credit score is determined, there’s a chance debt consolidation could actually improve your credit score.

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

Lastly, student loans are often seen as good debt. They are also considered installment loans whereas credit cards entail a revolving line of credit. Since your credit score is determined by considering factors such as your “credit mix,” diversifying your credit with different types of loans can lead to a better credit score over time.

Does consolidating student loans hurt your credit?

While consolidating student loan debt can sometimes improve one’s credit, the opposite could also happen – at least at first. Because debt consolidation requires a new loan, your loan servicer will complete a “hard pull” on your credit report. This hard pull allows them to assess your credit worthiness, but it can cause a temporary drop to your credit score.

The good news is, any temporary hit to your credit score caused by a hard inquiry will not last long. In normal circumstances, negative effects only last a few months. Most of the time, the benefits of consolidating student loans far outweigh the cons. As always, you should consider your unique situation and weigh the pros and cons before you decide.

Federal student loan consolidation vs. private student loan consolidation

At this point, you’re probably wondering whether consolidating your student loans will make sense. Will it help you save money? Help pay down debt faster? Improve your credit score?

At the end of the day, the answer to these questions depends on your specific circumstances, your credit history and score, and how much you owe.

First, it’s important to differentiate between federal loan consolidation and private loan consolidation. With federal loan consolidation, you’ll consolidate your loans with a Direct Consolidation Loan. These loans let you combine most federal student loans into a new loan with a lower monthly payment. The lower monthly payment is usually the result of extending the repayment timeline. So, you’ll pay less toward your loan balance each month, but for years longer than you normally would.

The downside with Direct Consolidation Loans is that they typically do not help you save money on interest. That’s because federal student loans are consolidated using the weighted average of your existing interest rates, rounded up to the nearest eighth of a percent.

It’s also worth noting that consolidating federal student loans into a Direct Consolidation Loan may cause you to lose important benefits like income-driven repayment, interest rate discounts, principal rebates, and more.

Private student loan consolidation works differently because you can choose among private student loan lenders. Not only can you lower your monthly payment by extending your repayment timeline, but you may be able to secure a lower interest rate and save money on interest, too.

Just like federally-sponsored loan consolidation, however, you may lose special loan benefits if you consolidate or refinance your student loans with a private lender. Make sure to research the pros and cons before you choose this route, and ensure the benefits far outweigh any lost protections or perks.

Is student loan consolidation my best option?

If you’re considering student loan consolidation but can’t decide, it’s important to understand which type of situations make debt consolidation a smart move. Here are a few instances where student loan consolidation makes a lot of sense:

You may want to consider student loan consolidation if…

  • You want to simplify your life with a single monthly payment. If you’re tired of juggling several loan payments at once, debt consolidation can make sense. Once you consolidate, you’ll have a single loan payment to make and keep track of each month.
  • You can get a lower interest rate with a private lender. If your student loans are at high interest rates and you think you can get a better deal, you may save money by getting a new loan with a lower interest rate. Keep in mind, you can find out how much you can save by exploring student debt consolidation options on LendingTree.
  • You want to lower your monthly payment. If the monthly payment on your current loans is too high, debt consolidation can help. Most of the time, you can lower your monthly payment by extending your repayment timeline. Keep in mind, however, that you may pay more interest the longer you extend your loans – even if your interest rate is lower.
  • You want to pay down your loans faster. While debt consolidation doesn’t guarantee early repayment, it can make the process easier. With a single monthly payment to worry about, it might be simpler to focus on repayment and come up with extra funds to pay toward your loan principal each month. You may be able to pay down your loans especially fast if you get a lower interest rate, too.

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


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