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

Michael Lux Best Of, Blog, Consolidation, Lower Payments, Student Loans 82 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?