Student Loan Consolidation Guide: Is it Good or Bad for my Credit Score?

Michael Lux Best Of, Blog, Consolidation, Lower Payments, Student Loans 53 Comments

Student loan consolidation is a great way to improve your credit score and lower your monthly payments. However, it is very important to look at the terms of your new consolidated loan to make sure that you are really getting a good deal.  There are many companies looking to take advantage of people struggling with their student loans.  It is critical that you do your research before you make any student loan consolidation decision.

Federal and Private Loan Consolidation

If you are considering consolidating your loans, one mistake that you definitely want to avoid is combining your private loans with your federal government loans. The primary reason is that no matter how good the rate or terms offered by a private loan consolidation, they almost never will be as good as those offered by a federal government consolidation. This is especially true if you have a bad credit score.  Repeat after me: NEVER CONSOLIDATE FEDERAL LOANS WITH PRIVATE LOANS!

If you read every article on this website, and you only learn one piece of information it should be to not consolidate your federal loans with your private loans.  This is a mistake that could cost you a fortune in the long run.  Federal loans are far better than private loans, and once a private loan is put with a federal loan, all of the federal loans loose their benefits.  Don’t make that mistake!

Consolidating Private Loans

Consolidating your private student loans is no easy task with a bad credit score.  It can even be hard with a good credit score.  The one conceivable exception would be if you were to get someone to cosign on your consolidated student loans.  As these consolidated loans can often be larger than $100,000 finding someone with good enough credit willing to sign may not be possible.  When dealing with private loans, instead of consolidation, working with the lender to lower your interest rate may be your best bet.

Another option would be just to get an unsecured loan and use it to pay down the balance on your student loans.  One advantage of this approach is that if you pay off student loans with this loan, you now have bankruptcy protection on the debt.  If you go through a peer to peer lending site, you can also see to it that the interest from your loan goes to regular people instead of big banks.  If you are into that sort of thing.

Federal Government Loan Consolidation

Federal Student Loan consolidation can only be done here.  The nice part about Federal Student Loan consolidation is that there is no credit check involved.  Everyone who has Federal Loans is eligible, even if your loans are in Default!  By consolidating you are able to lock in your interest rate and you can qualify for one of the many favorable Federal Student Loan Repayment Plans.  Be on the lookout for sites and services that offer to consolidate your federal government loans.  This is something you can do for free online.  Even though I have had my issues with federal loan consolidation, doing it yourself if much better than getting scammed into paying for a service you don’t need.  Another perk about the direct loan consolidation is that it actually improves your credit score.

How does loan consolidation improve my credit score?

When you consolidate your student loans, a number of factors are modified in your finances.  Most of these changes will cause creditors to look more favorably upon you.

One factor that determines your credit score is the number of lines of credit that you have open.  If you have too many, your score will go down.  By consolidating your student loans, you replace your many student loans with one new loan.  You still have the same amount of debt, but the number of lines of credit goes down, thus raising your score.

Another credit score advantage of student loan consolidation is that it will show that you have paid off all of your other loans.  As you can imagine, a record of debt repaid is a good thing.  Depending upon how your loans are consolidated, it could read that your loans were refinanced or it could just say that you paid in full.  Either way, your credit score is helped.

One final advantage of consolidating your student loans is that it can often lower your monthly payments.  This helps your credit score because the ratio of debt to income will go down.  This especially helpful if you are trying to secure a mortgage.

The Bottom Line

Ultimately, if you have good or bad credit and are thinking about consolidating your student loans, it will depend upon the type of loans that you have.  For Federal Loans, consolidation is usually a great idea, but for private loans it gets more tricky and it is important to be careful who you do business with.

Have you consolidated your students loans?  What tips or advice would you offer?

  • We consolidated immediately, but that was so long ago that I don’t know what kind of impact it had on my credit score.

    But I do remember getting a rate somewhere between 4-5% which didn’t feel too abusive at the time (2003-2004).

    • I had to consolidate immediately as well. I had FFELP loans and in order to get them eligible for public service loan forgiveness I had to consolidate. It can be a pain to go through, but I did notice a nice little bump in my credit score.

  • Hey Michael, I found this info to be very informative. As someone who currently has a small amount of loans this is very beneficial to me.

    • Thanks Brett! I’m glad I could help.

  • This is excellent Michael. Forwarding to my daughter who is a junior in college. Her boyfriend and many of her friends are seniors or recent grads and they all need this information.

    A lot of kids don’t even know how much debt they are in until they are close to graduation. Parents handle all of the financial dealings with the university and kids find out shortly before they graduate just how bad things are.

    • Thanks Betsy! I am happy to help out. The earlier we can get this information to people the more money they can save. I wish someone would have sat me down and taught me all the essential information about student loans before I went off to school.

  • I consolidated my loans while still in school…I think it was around 2006 or so when student loan interest rates were really low. It was a no brainer…the portion I was able to consolidate is about 2.5% It appears all graduate student loans are fixed at 6.8% nowadays. Also, I wasn’t in a rush to buy a house (as if I’d have the money) back then so while my credit score is important to me…I didn’t worry to much about it in terms of the affect of consolidation.

    • 2.5% That is amazing! I would love to find a rate that low. Well played Andrew.

  • Amanda L. Gehlert

    I was lucky. First my loan amount was not astronomical (about $25,000), and second I bought a house before the bubble. When interest rates started to decline, I refinanced with a cash-out to pay off the student loan. I reduced the rate I was paying from 9.0% per annum to, I think, 4.5% (at the time). I’ve since refinanced down to 2.625%. Obviously, not everyone can do this, but it is one method.

    • That is a great method. Saving over 4% on a 25k loan is awesome. Well done!

  • Adam

    Amazing advice and exactly what i was looking to find! so glad all my student loans are federal loans making the process much easier!! Also, thanks for the credit info was kind of curious about that!

  • Hillary

    Hi Michael, thank you for this information! I have a question. I have negative credit reporting from the US Dept. of Ed. from loans I did not pay when I graduated college. Since then (2-3 years ago), my loans have been “sold” to other lenders. I have been in good standing with those, and have positive reports from those (5 loans total) on my credit report. I am wondering if I consolidate, will the US Dept. of Ed. loans be removed from my report, or is there a way they must have this removed? I know they can be removed in 7 years from the date they were sold, but I want their report gone. Can you help? -Hillary

    • Mark

      This is a great question. I am also curious.

    • Tonio Norman

      I’m having Lexington law work on removing my old Dept of Ed negative since I consolidated my student loans here recently. They have been improving my credit and removing thing I didn’t know I could..If you couldn’t pay at the time they were sold of to collections because of hardship they can get that forgiven on your credit… Combo that with consolidation!!! YES!!! I’m so excited…I can start looking to buy a home with great rates…..If my calculations are correct I will be at a 690 by the end of the year.

    • Blen Butterson

      They were probably never sold, as the Dept. of Ed retains ownership but transfers loans from different servicers. The only lender is the Department of Ed. It’s unlikely you can get the default notation removed (if that is what you are referring to) before 7 years without using what is known as Rehabilitation, an option that would only be available if your loans were still in default.

      Rehabilitation will remove the default notation after the 9 month repayment period to bring the loans out of default. But if you are current now, this wouldn’t be an option.

  • CMS

    If I decide to consolidate, I believe that I can choose the loans to be included, right? All of of my loans are federal loans except one thru Sallie Mae that my parents co-signed for. I’m paying a stupid 9.25%. I am almost half way thru paying the $14k loan. Is it still a good idea to “consolidate” just one loan, and leave the FedLoan loans?

    • This is a tricky question that depends upon the type of loans you have. Federal student loan consolidation, when done through the federal government, does not help your interest rates (they actually use a weighted average), so there wouldn’t be any advantage to consolidating one federal loan.

      However, private loans are a different story. If you have private loans and you want to consolidate just one, you could lock in a lower interest rate. In this case, it would technically be called refinancing rather than consolidating, but the process is similar.

      Does that make sense?

  • Tyger Kyon

    Oh crap, so Sallie Mae is a private loan lender? And how can you distinguish between Federal Loans and Private Loans?

  • Alex_MIL

    I have a student loan that shows up on my credit record as 4 Dept of Ed/Sallie Mae accounts. When I pay them, I just send a single payment to Sallie Mae that splits among them. Would it be wise to consolidate these loans? I’m in the military, so I know getting low interest rates wouldn’t be an issue. How much would this help my credit score? Besides this, all I have is a $3900 auto loan and a $1000 credit card balance which shall both be paid off very soon.

    • Alex, your question is somewhat complicated as there are a number of factors to consider, but it is a great question. I’m actually going to make it the next article for the website. Hopefully I can get a full response ready by Sunday. Thanks again for your great question!

  • Liz Koenig

    I am in default and want to fix the situation but I am torn between consolidation and rehabilitation. The debt collector is pushing rehabilitation but the payments are so high. But then I started thinking of the consolidation route. What do I do?? I have about 17k between subsidized and un subsidized stafford loans.

  • Just me

    I consolidated my federal student loans and my credit score went up 100 points!

  • Mike

    Federal Loans are way worse than Private loans. If you have a Federal loan like Sallie Mae- Navient or any other government backed place they have you for life my friend. If you file bankruptcy they can keep sueing you all the way until your 99 years old for the money you didn’t pay back.

    On the other hand if you have private loans and file bankruptcy they have a 7 year window time frame to file a suit against you. So if you are planning on not paying them back do not consolidate to federal loans EVER.!!!

  • Laurie

    Hi, I currently have a student loan with Navient. I have about $11, 400.00 I owe on my student loan. I am currently making one payment that is being split into 3 and paying 3 different loans. Also they are charging me interest for all three loans. Would it be best to consolidate my loans all in one now? Will that make my what I owe go up?

  • vaness

    Hi. I have several student loans and they have defaulted. These are federal student loans and I’m wondering if consolidation is right for me. I do not work as I’m caring for my new born twins. My husband is the sole provider and we have had federal offset already. Will consolidation stop federal offset? And will filing for consolidation Hurt my credit score. Can it help us purchase a home? Please help.

    • If you are interested in purchasing a home, you will probably want to get the defaults addressed first. As I understand it, there are basically two routes you can go. You could consolidate immediately, or rehabilitate your loans first. There are pros and cons to each approach. I’d suggest chatting with your loan servicers about your options and then discussing those same options with a local mortgage company. Some mortgage lenders will have great advice on repairing your credit to get you eligible for a home loan.

    • capacitated

      Consolidation will pay in full your defaulted federal student loans and give you a new loan with a clean slate, thereby ending the Treasury offset. In order to consolidate federal student loans in default, you must agree to enter an “income-driven” repayment program, of which you have several options. These income-driven repayment programs generally do not require a monthly payment until the borrower’s income exceeds 150% of federal poverty guidelines, which are adjusted for inflation annually. You can consolidate only once so it’s important to keep required payments (if any) current and to avoid another default. Getting your original defaulted loans paid off will improve your credit score far more than the small ding of pulling your credit report when you apply.

  • Brett

    This all seems like great advice, and I thank you for answering what was absent in the FAQ of the site. I do have one concern, as I am still learning how my credit score is calculated. I have excellent credit, but I am trying to qualify for a building-perm loan (essentially a mortgage) and all of my wife’s student loans came out of deferment, as she is all done with school and has been working in her field for over a year. I know that new lines of credit or new loans affect your credit score, so my concern is in regards to any negative side effects of consolidating all 17 of her Dept of Ed loans. Does this new consolidated loan actually count as a new loan, and as such affect my credit score negatively, or does it look like I am paying off student loans which will give my score a positive bump?

    I hope I asked the right questions and provided you with enough background without being too thorough. And also, your blog post needs a slight update as the site seems to be phasing out and being replaced by Thank you again for your great advice!

  • Kenny Moore

    Hi, I have a credit score of around 590 according to Credit Karma at least. I’m looking to improve my credit to buy a home and have paid off nearly everything on my credit report. The only negative things remaining are the past payment historys on my student loans which are federal, 9 total I believe. They have been current for about 5-6 months. My question is, will my credit score improve by consolidating those loans or will it go down because of the consolidation? I’ve seen people post instances of both. Thank you!

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  • Phil

    So combining federal and private is a no-no. Here’s my dilemma, I have about $7,500 in federal loans at 6.55% with 3 years remaining, and I have about $18,000 in private loans at call it 4% with 8 years remaining. If I lump those all together into one of Citizens new consolidation loans with a 5 year payoff and 2.13% , that will put me at a $445 a month payment, with WAY less interest… (Score is 780)

    So in my situation, is combining still a terrible idea? Even with my federal loans being a such a high interest rate (compared to what is being offered)?

    • In some cases combining federal with private loans in a private consolidation is not a bad idea.

      The important thing is that you the borrower realize the federal perks that you are giving up: such as income based repayment plans and student loan forgiveness.

      If you are in a situation where you will definitely be paying off your federal student loans as fast as possible and an in full, and the only question is how much interest you will be paying on your way to a zero balance, then private consolidation could be a great option. (Just be sure to shop around to make sure you are getting the best rate:

    • Phil

      Right, I don’t qualify for the income based repayment plans, and while I do qualify for the loan forgiveness, my federal loans are on a 10 year payoff schedule and the forgiveness only works AFTER 10 years, if I had known that at the start I would have refinanced them out to 30 and accelerated the payoff of the private loans. As it stands now, I will pay off the federal loans before I can get them forgiven. (As far as I can tell that is.)

    • Amber

      I have loans with navient & edfinancial, would consolidating them hurt my credit? Currently it’s listed as 10 separate accounts

    • In most cases consolidating many loans into one new one will help your credit score, but depending upon the age of your loans and some other factors, it is possible that it goes down.

      However, the consolidation decision really comes down to dollars and cents. If you can save money by doing it, it is a good idea. The credit score change in either direction is slight.

      You certainly don’t want to consolidate just because it might help your credit score… it should only be done if it will save you money.

  • Liuby

    Hi. I have a total of 31,000 in subsidize and un subsidize loans originally with sallie Mae and now navient. All in good standing. Just purchased a car and my credit came back at 815. I get calls to lower my payment every day but I’m scared of scams. What should I do?

    • There are definitely a lot of scams out there and a ton of mistakes that can be made. We’ve prepared a long list of companies and reviewed them here:

      Hopefully you can use this tool to separate the good options from the bad and use your good credit to get lower payments. Just make be careful with refinancing because it means giving up a lot of perks with the federal loans and there is no way to undo it.

  • Anna

    My score went down. It closed the old account that had ontime payments for 3 yrs and opened a new one that now only has 2 months of history. Now my oldest account is only 2 months old so my score dropped. Wtf

    • Danielle LakersCrabbe-Bethune

      Mines did too. 48 points!!

  • Jennifer Batten

    Since I checked this page while deciding I thought it fair I come back and update. I consolidated with all my loans in default, many sold to other companies only adding more negatives and a garnishment order pending. Once the new loans came on my score went up. The old loans still don’t show as paid or 0 balance but just having one extra account in good standing, technically 2 as the sub and unsubsidized are considered seperate loans. Tu went up like 80 points, Equifax bout 23 bringing each just under 600. I financed a car 6 months ago with a 23% rate for 6 yrs and was able to refinance days after the loan hit my credit report for a 14% loan for 4yrs saving 12k on interest but really allowing me to get that paid off much quicker. I am so happy I consolidated instead contacting all the seperate companies and setting up rehab but I had really let my situation go too far.

  • Daniel

    I am current with my two federal loans now but when I first got out of school 2013-14, I was young and stupid and didn’t pay and I have multiple 90day missed payments. I would like to consolidate the loans to mark them as paid and get that off my report! Is this possible?

    • Has the loan ever defaulted or does the credit report just indicate that it was previously 90 days delinquent?

  • Danielle LakersCrabbe-Bethune

    This is not true…. I got a notification today that my score dropped 48 points! I’m pissed because I’ve been working diligently cleaning up my credit. My debt to income ratio is very low. I also keep my credit utilization very low. I pay down my card (which I hardly use) and it at 10% utilization. I’m so mad.

  • Husein Alibhai

    Hello. I have 3 Grad school PLUS loans (1 subsidized, two un) from .gov with current balance of $32-33k. Started in 2011…was laid off in 2012 where I have two old deliquent remarks…but been paying everything on time current for the past 4 years. Credit score is between 730-775 depending on bureau and i have one medical bill on each (in dispute). Paying $572/month…with weighted avg 7.5%. SOFI prequalified me for 3.5+….i have total job security and my income ($110k right now…and going up as we expand)….so main thing for me is I want payment down…and I see 10yr option at $335/month saving me $240/month and if i just did that…it would still come less…but i expect to do a total payoff of balance prob within next 18-24 months. That being said…am I better off doing a long loan, low payment since i get more cash on hand now kowing ill pay it off…or is safest the 10 yr $335? How picky are they once I submit paperwork and they run credit report? THANKS!!!!

    • There really isn’t a right answer or a wrong answer to the repayment length question. The shorter the loan term, the lower your interest rate will be. However, as you note, the longer repayment offers more flexibility.

      One thing to keep in mind is that regardless of what length you pick, you always have the option of paying extra to pay it off much faster.

      Are their any other financial goals that you have coming up? You should consider how these options affect your ability to buy a house or save for retirement.