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Will Consolidating Student Loans Help Your Credit Score?
Jason Lee – Contributing Writer Last Updated: June 5, 2020
There are many reasons you may be looking to improve your credit score — preparing to make a big purchase, cleaning up your financial health, applying for a job or taking control of your financial life. Depending on how bad the situation is, you may be able to fix things with small changes over time, or you may need to enlist the help of a credit repair company to get back on track. For many of you, you may also be wondering “will consolidating my student loans help my credit score?”
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan). Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
Due to the nature of Credible’s student loan purchase and refinancing platform, we are unable to assign it a SimpleScore, as the rates, fees and loan amounts depend on the lender you choose from its marketplace.
Variable rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Rates are subject to change at any time without notice. Your actual rate may be different from the rates advertised and/or shown above and will be based on factors such as the term of your loan, your financial history (including your cosigner’s (if any) financial history) and the degree you are in the process of achieving or have achieved. While not always the case, lower rates typically require creditworthy applicants with creditworthy co-signers, graduate degrees, and shorter repayment terms (terms vary by lender and can range from 5-20 years) and include loyalty and Automatic Payment discounts, where applicable. Loyalty and Automatic Payment discount requirements as well as Lender terms and conditions will vary by lender and therefore, reading each lender’s disclosures is important. Additionally, lenders may have loan minimum and maximum requirements, degree requirements, educational institution requirements, citizenship and residency requirements as well as other lender-specific requirements.
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For many in this situation, not all of those loans are through the same lender or on the same loan. You may have different school loans that were taken out for different purposes. Additionally, each of these loans may have different interest rates, term lengths and repayment factors. Some students may have student loans through both the federal government and private companies.
If you find yourself making multiple student loan payments every month to different places, you have multiple student loans on your credit report. But even if you’re only making one payment, you may have several different loans on your credit report. Every time you reached out for more funds on your student loan, they may have been recorded and reported as a brand new account. Some of the most common lending service companies you might see on your credit report include:
VSAC Federal Loans
Should you consolidate your student loans?
Loan consolidation is the process of taking out one new loan to pay off all of your old loans. The new loan provider pays off every individual loan, and you now only owe money to the new loan provider. In many instances, you can get a better interest rate, lower payments or more favorable repayment terms through consolidation. You’re still going to owe the same amount of principal, but you may save significantly on interest.
Will this help your credit score? Yes and no. In the short term, it may lower your credit score as it will show up as a new debt account opening. Consolidating your debt will also lower the age of your credit accounts, which can have a negative effect. However, if consolidating your student debt helps you to save money, make more on-time payments and even make additional payments towards your principal, it can have a positive effect and raise your credit score.
Who is it right for?
You should consider consolidating your student loans if you’re able to save on interest or get more favorable repayment terms. Additionally, if you’re looking to simplify repayment by cutting all your payments down to one it may be a favorable move.
If your goal is to raise your credit score, you will need to consider the short-term and long-term effects. Ultimately, if it helps you to pay off your loans faster and stay up on payments, it will be the right move. All you need to be able to qualify for consolidation are multiple loans. You’ll want to reach out to loan consolidation companies to see what borrowing terms you’ll qualify for.
What are some of the benefits of consolidating student loans?
More favorable repayment terms
Shorter or longer loan term lengths (flexibility)
Only have to make one monthly payment
Federal vs. private student loan consolidation
Your student loans will either be all federal, all private or a mix of the two. Federal student loans are backed by the government and can be consolidated into one loan at absolutely no cost to you. Private student loans are serviced through private for-profit companies. These loans can also be consolidated but will need to be consolidated through a private company.
If you have private and federal loans, your only consolidation option is to put them all into a new private loan. While this may save you and get you more favorable repayment terms, you will lose any of the protections or features that come with federal student loans. It still may be the right move for you, but it is something to be aware of.
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How is student loan consolidation difference from refinancing?
Student loan consolidation is the process of combining several loans into one. If you only have one loan, though, your option is to refinance. Refinancing is similar to consolidation, where you seek better terms or interest rates. The only difference is the changes are made to a single loan and not to multiple loans. If you have multiple loans and one that has a very high rate, you may want to look into refinancing that individual student loan and leaving the others as is.
Got federal loans? Consider income-based repayment plans instead
If you have federal student loans, you have options unavailable to private loan holders. At any time during the loan, you can switch your repayment plans. A plan to consider is the income-based repayment plan. With this plan, your loan payment is contingent on your income and what the government determines is an affordable payment.
If you’re looking to keep raising your credit score and are worried about keeping up with payments on your current plan, this might be a viable option. Applying for this repayment change can be done at the studentaid.gov website.
Too long, didn’t read?
Consolidating your student loans may affect your credit score in different ways based on the particulars of your unique situation. If you’re struggling to keep up with payments, consolidating to stay on-time will certainly have a positive impact on your score in the long run. You will want to weigh the short-term effects student loan consolidation may have on your credit against the benefits of saving on interest payments over the long run.
Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill sets with the rest of the world. Follow Jason on Facebook here
Courtney Mihocik is an editor at The Simple Dollar who specializes in insurance, personal finance, and loans. Previously, she wrote and edited for Interest.com, PersonalLoans.org, Ballantyne Magazine, Thread Magazine, The Post, ACRN, The New Political, Columbus Alive and the Institute for International Journalism.