loan sign illuminates the consequences of refinancing or consolidation on credit scores

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

Michael Lux Best Of, Blog, Consolidation, Lower Payments, Student Loans 49 Comments

Many student loan borrowers can improve their credit score by consolidating or refinancing their student loans. Unfortunately, not all borrowers see an increase. Some borrowers may see their score drop by consolidating or refinancing.

Though federal direct consolidation and private student loan refinancing are very different processes, the impact on a borrower’s credit score is usually similar.

Today we will discuss the factors that can cause the credit score to increase and the circumstances in which a credit score can drop. We will also discuss the reasons that a credit score shift should not be a concern or consideration for most borrowers.

How does loan consolidation improve my credit score?

When consolidating student loans, a number of factors credit score variables are modified. Most of these changes improve a borrower’s creditworthiness, according to the credit bureaus.

One factor that determines credit score is the number of lines of credit that are open. If consumers have too many, their score will go down. By consolidating your student loans, many student loans are replaced with one new loan. The borrower still has the same amount of debt, but the number of lines of credit goes down, thus raising the credit score.

Another credit score advantage of student loan refinancing is that many loans will show as paid in full. It shouldn’t come as a surprise that a record of debt repaid is a good thing. Depending upon how the loans are consolidated, it could read that the loans were refinanced, or it could just say that they were paid in full. Either way, the credit score goes up.

One final advantage of consolidating student loans is that it can often lower your monthly payments. This helps borrowers who are looking for new lines of credit as it will improve their deb-to-income ratio. This especially helpful for those trying to secure a mortgage.

Can Refinancing or Consolidation Cause a Credit Score to Drop?

It would be nice if consolidation or refinancing caused a predictable movement in the score. Unfortunately, it fluctuates greatly.

In some circumstances, a borrower’s credit score can drop.

The main explanation for a drop in credit score is due to age of credit.  The longer the credit history, the better a credit score. When consolidating or refinancing the old loans are paid in full. This means that those lines of credit are marked as closed. This could be bad for borrowers who don’t have any items on their credit report other than a student loan. If the old lines of credit, the original student loans, are closed and the new loan is the only open account, the age of credit will drop significantly.

Another factor that has a minimal effect on credit score is checking interest rates. Generally speaking, checking rates causes a short-term drop in credit score. Too many credit inquiries can be viewed as a sign that a borrower is experiencing a financial hardship and is therefore more of a credit risk. However, shopping around for the best interest rates is considered a single inquiry by the credit bureaus, so borrowers are still encouraged to check rates with many lenders in order to get the best deal.

Ultimately, most borrowers will likely see a small increase in their credit score, but as noted in the comments by some readers, it is still possible that the credit score can drop.

That all being said, the credit score movement shouldn’t be a concern…

Most People Shouldn’t Worry About Their Credit Score when Refinancing

The desire to improve and protect a credit score is responsible, but it shouldn’t be the first consideration.

The value of a high credit score comes from the ability to secure desirable terms in lending. In other words, the value of a good credit score is the chance to save money.

The purpose of refinancing or consolidating student loans is to save money. If the credit score is high enough to qualify for a low rate or favorable repayment plans, then the credit score has done its job.

In many cases refinancing or consolidation can save hundreds of dollars per month and thousands of dollars per year. With that much money at stake, worrying about what Equifax or TransUnion thinks seems a bit silly.

The one exception would be for borrowers who are looking to purchase a home in the near future. A fractional difference in the interest rate on a mortgage can make a huge difference to the homeowner.  People on the hunt for a house should discuss any actions that might impact their credit score with their lender or mortgage broker.  The home loan experts should be able to recommend the best path forward.

The Bottom Line

Most borrowers should expect their credit score to improve slightly by refinancing or consolidating their student loans. That being said, there are reasons that the credit score could drop for some people.

Ultimately, the thing that matters most whether or not refinancing or consolidating improves a borrower’s finances. If the process saves money, a blip on the credit score radar shouldn’t matter.

Have you consolidated your student loans? What tips or advice would you offer? Please leave your thoughts in the comments section.

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No Waste

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).

Brett @ wstreetstocks

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.

Betsy @ ConsumerFu

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.

Andrew@LivingRichCheaply

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.

Amanda L. Gehlert
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.

Adam
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
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

Blen Butterson
Blen Butterson
Reply to  Hillary

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.

Mark
Mark
Reply to  Hillary

This is a great question. I am also curious.

CMS
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?

Tyger Kyon
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
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.

Liz Koenig
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
Just me

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

Jeannette Tyson
Jeannette Tyson
Reply to  Just me

How fast did thr score go up? Was it soon?

Just me
Just me

Less than a month. I was in the 500s

Jeannette Tyson
Jeannette Tyson
Reply to  Just me

Oh okay cool, well I have private loans through Navient I hope for the same results

Danielle LakersCrabbe-Bethune
Danielle LakersCrabbe-Bethune

My score dropped 48 points today.

Billy White
Billy White
Reply to  Just me

Wow. What was your previous credit score ? I consolidated about a month ago & I’m hoping for the same results . Credit score currently stands at 540.

maverick
maverick
Reply to  Billy White

How much increase in credit score did you get after consolidating your Federal Student loans?

Mike
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
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
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.

capacitated
capacitated
Reply to  vaness

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
Brett

This all seems like great advice, and I thank you for answering what was absent in the FAQ of the studentloans.gov 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 loanconsolidation.ed.gov site seems to be phasing out and being replaced by studentloans.gov. Thank you again for your great advice!

Kenny Moore
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!

Phil
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)?

Amber
Amber
Reply to  Phil

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

Phil
Phil
Reply to  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.)

Liuby
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?

Anna
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
Danielle LakersCrabbe-Bethune
Reply to  Anna

Mines did too. 48 points!!

Jennifer Batten
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
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?

Danielle LakersCrabbe-Bethune
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
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!!!!

The Student Loan Sherpa

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!