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Written by Kristyn Pilgrim

How Does a Student Loan Consolidation Affect Your Credit Score?

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    How Does a Student Loan Consolidation Affect Your Credit Score?

    Written by Kristyn Pilgrim

    Students graduate from college with an average of $30,000 in student loans, often carrying more than one loan at a time. Student loan consolidation can make it easier for borrowers by lumping multiple loan payments into one. (Learn More – Benefits of Student Loan Consolidation)

    With student loan consolidation, your old loans are paid off by the lender, and you will be issued a new loan. 

    The process of consolidating your student loans requires an inquiry into your credit history, which can cause your credit score to drop slightly. (Learn More – Does Debt Consolidation Hurt Your Credit?)

    The drop is usually not very substantial, and your credit score can quickly come back up within a year or two.

    Student loan consolidation can help your credit in the long run. It makes payment management easier and can, therefore, help build your credit. (Learn More – Is Student Loan Consolidation Right for You?)

    Does Debt Consolidation Hurt Your Credit?

    There are two main types of student loan consolidation lenders: the federal government and private lenders.

    If you have more than one federal student loan and are looking to consolidate them into one loan, you can do so through the U.S. Department of Education — for free. It generally does not trigger a credit check, so it should not negatively impact your credit.

    Consolidating loans —both private and federal — through a private lender is also known as refinancing, which requires a credit inquiry. Typically, you need a credit score near 700 or higher, as well as a positive payment history to get a reasonable rate on student loan refinancing. 

    The necessary credit check can cause your credit score to drop a few points, but the dip is usually minor. Your score should go back up in a year or two. 

    Through student loan consolidation, your initial loans are paid off, and the lender issues a new loan with different terms. This can lower the age of your account and slightly impact credit temporarily. Other factors, such as credit card debt, can hurt your credit score far more than consolidating student debts can. 

    Consolidating your student loans combines all your monthly payments into one, which can make it easier to keep up with them. Just like any other debt repayment, making timely student loan payments can boost your credit and, in turn, help borrowers boost and improve their credit score.

    Benefits of Student Loan Consolidation

    The cost of higher education has gotten so high that a quarter of all adults in the United States have some form of student loan debt. The majority of students require more than one loan to pay for college, which can make post-graduation payment challenging to manage.

    Student loan consolidation can simplify things and make it easier to make your payments. It is often easier to budget for and plan around one payment rather than multiple.

    Additional benefits of student loan consolidation include:

    • Lower monthly payments.
    • More time to pay your loan back. You may be able to extend the life of your loan from 10 years to 30 years, for example.
    • Saving money over time. Refinancing a student loan to a lower interest rate can decrease the amount you will owe overall.
    • Switching to a fixed interest rate from a variable interest rate loan.
    • Access to additional repayment options and plans.

    Student loans provide an opportunity to start building credit, as they are often simple for young adults without extensive credit to get. However, carrying multiple loans can be hard to keep up with, and making just one student loan payment late can drag down your credit score. Student loan consolidation simplifies loans drastically, making it easier to pay timely each month. 

    Defaulting on a student loan, or ceasing all payments, can cause your credit score to plummet. Considering the fact that a default stays on your credit report for seven years, it could take nearly a decade for your credit score to recover — significantly longer than it would take to recover after a slight dip from consolidation.

    On top of your credit taking a small ding, student loan consolidation may also cause you to lose some benefits from your initial loans. For instance, federal loans come with a six-month grace period; after a student loan consolidation, repayment starts in just two months.

    You will also lose access to federal student loan benefits if you go through a private lender for debt consolidation. This can include some repayment options and loan forgiveness programs. These benefits sometimes outweigh any upsides from consolidating your student loans, so consider this carefully before you proceed.

    Lastly, student loan debt consolidation does not always save you money. Federal student loan consolidation may result in paying more over the life of the loan instead of less. The interest rates are averaged and then rounded by one-eighth of a percent. While your monthly payments can be less due to a term extension, increased interest rates can raise the total pay-off amount.

    To decide if student loan consolidation is the right choice, considering your goals is vital. Making your student loan payments on time is essential to protect and improve your credit score, but your overall debt may increase if you choose to extend the life of your loans. 

    If you have good credit, or a willing cosigner with excellent credit, and have been paying on your student loans consistently, you may be able to consolidate your loans into one loan with a lower interest rate and ultimately save money. 

    Variable interest rate loans may make it challenging to budget accordingly, as rates and monthly payments are subject to change. In this case, switching to a fixed interest rate loan through consolidation or refinancing may be helpful. 

    A credit counselor can help you decide which option best fits your needs.

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