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?”
Consolidating your student loans may help your credit score indirectly by making it easier to keep track of all your debts in one monthly payment, as well as help you pay off your student loans faster.
Multiple student loans on your credit report
Nearly two out of every three college graduates had student loan debt in 2017. The average amount? $28,650. The majority of debt held by college graduates fell between $4,400 and $58,000, with some outliers on both sides.
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
- OSLA Servicing
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?
- Lower payments
- Interest savings
- 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.
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 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.
The bottom line
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.