A couple days ago reader Alex posted a great question in response to our article about whether student loan consolidation was good or bad for your credit score.
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.
From this question, it appears that this particular reader is in great shape. He has four student loans, but as Department of Education loans, they are all federal and therefore, the best kind of loans. The federal status of these loans will have a major impact on the ideal way to handle these loans.
Two ways to consolidate
Federal government loans can be consolidated in two different ways. If you consolidate your federal loans through the government, available through the Department of Education here, you won’t be able to lower your interest rates. Federal consolidation actually takes great care to make sure that your interest rate stays almost exactly the same regardless of whether or not you consolidate. Unfortunately, things like a stable military job or great credit don’t really help with federal consolidation.
The other way to consolidate would be to go through a private lender. The perk of this process is that it can lead to lower interest rates, but you lose the many federal benefits associated with federal loans.
Risk vs. Reward on Consolidation
There are major pros and cons to consolidating your loans. Things like interest rates, repayment terms, and student loan forgiveness should be your primary concerns.
As military service is a public service position, private consolidation should probably be avoided because it would eliminate the possibility of forgiveness. However, eliminating private loan consolidation also eliminates the possibility of paying less interest. We recently weighed these issues for a grad considering consolidating 30k in federal loans.
You may want to also avoid federal consolidation because it eliminates the possibility of your targeting your high interest loans. If you have four loans and are making more than the minimum payment, you can apply the extra money paid towards your highest interest loan first. By paying off your higher interest federal loans first, you will pay less in the long run.
What about the credit score?
Student loan consolidation can help your credit score, but the reality is that it isn’t a big change. The other factors that go into a consolidation decision matter far more than a slight movement in your credit score. Being smart about your loans can save thousands of dollars over the life of your loan. Saving money will almost always trump a slight change in your credit score.
Ultimately, the bump in credit score is a nice little perk if you do decide to consolidate, but because there are much more important issues at play, it shouldn’t be a factor in your consolidation decision.
The Best Bet
Without knowing detailed financial information, it is impossible to definitively say whether or not consolidation is a good idea. However, paying your student loans off quickly and efficiently is almost always a good idea. In a situation like this, the best route may be to pay whatever extra you can spare each month and direct your lender to apply the extra money to the highest interest loan.