Student Loans

Student Loan Consolidation: Does it Hurt or Help Your Credit?

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 5 minute read

Student loan debt can be incredibly burdensome. From losing sleep at night to increased anxiety, studies are showing that this form of debt can be detrimental to a borrower’s mental health. 

Are you one of these people? Are you looking for a way to reduce your student loan repayments? If so, you should consider student loan consolidation. This form of refinancing can lead to an array of benefits, including reduced payments, and possibly, a decrease in your overall repayment term. What you need to consider, though, is whether or not consolidating your loans will hurt or help your credit. For some of you, the health of your credit may not even be a factor in helping you choose whether or not to consolidate. Sometimes, consolidating is the only option that will provide some type of debt relief and it’s worth hurting your credit. Still, for those who are wondering if consolidating is the best choice, here’s a quick look at a few student loan statistics, an inside glimpse at how consolidating affects your credit, as well as a how-to guide for refinancing them.

Student Loan Debt Statistics

As of the third quarter in 2017, there were 6.5 million student loan borrowers who were still in school; their debt totaled $120.9 billion. 1.7 million borrowers had loans in a grace period, with their debt totaling nearly $42 billion. 18.3 million borrowers were in the repayment phase of their loans and 3.5 million had a deferment on their loans. 2.7 million had one or more loan forbearances and an astonishing 6.5 million were in default on their student loans. If you are having trouble repaying your student loans, these statistics go to show that you aren’t alone.

Here’s a look at statistics for borrowers and their repayment plans:

  • 12.34 million borrowers are on the standard 10-year plan
  • 1.76 million borrowers are on a standard over 10 years plan
  • 3.18 million borrowers are on a graduated under 10 years plan
  • 300 thousand borrowers are on the graduated over 10 years plan
  • 620 thousand borrowers are on the income-contingent plan
  • 3.6 million borrowers are on the income-based plan
  • 1.11 million borrowers are on the pay-as-you-earn plan
  • 1.59 million borrowers are on the revised PAYE plan
  • 500 thousand borrowers are on the alternative plan

When Student Loan Consolidation Makes Sense (and when it doesn’t)

It is very important for you to understand that student loan consolidation is not a one-size-fits-all solution for all borrowers. The type of loans you have and their interest rates will play a large role in whether or not it is financially wise to consolidate them. And for many borrowers, consolidation simply isn’t the best choice. Fortunately, we’ve broken down three scenarios in which consolidation does make sense and two scenarios when it doesn’t. Continue reading to see which scenario applies to you.

Scenario 1: You got your loans with a cosigner

When a friend or loved one cosigned for your student loans, the reality is that they took on the responsibility of repaying the loans in the event that you can’t. In fact, if you miss only a single payment, this can negatively affect the cosigner’s credit. If you feel at any time that you are going to have difficulty repaying your loans, you should speak with your cosigner about having the loans consolidated. He or she will probably be more than happy to be released from their responsibility to keep the payments up to date.

Scenario 2: You borrowed money through private loans

When compared to federal student loans, private loans tend to have much higher interest rates. These loans also come with less-forgiving repayment terms. And for those who opted for a private student loan with a variable interest rate, it’s not uncommon to see it jump as high as nine percent. Because of this, most people with private student loans will benefit from consolidating them. Not only can consolidating them reduce the monthly repayment amounts, but also the length of time you are in repayment.

Scenario 3: Your loans have a high-interest rate

Regardless of the type of loans you took out to pay for your schooling, if they have a high-interest rate, it will be in your favor to consolidate them. Some refinancing lenders can hook you up with a consolidation loan that comes with an interest rate as low as 3.25 percent. Over the time period of repaying your loan, a lower interest rate can save you several thousand dollars.

Scenario 4: You are seeking repayment amounts based on your income

If you took out federal student loans to pay for your schooling, you can apply for an income-based repayment plan. In doing this, your repayment term is normally more than 10 years, however, this decreases your monthly payment amount. Unfortunately, if you are in need of this type of repayment — one that scales according to your income — then consolidating your loans will likely not be a wise choice.

Scenario 5: You are seeking student loan forgiveness

Federal student loans often qualify for loan forgiveness if you work for a non-profit or governmental agency. To qualify for loan forgiveness, you will need to make 120 months of qualifying payments; that’s 10 years of payments. If you consolidate your loans, though, you will no longer be eligible for student loan forgiveness.

How-to-Guide for Student Loan Consolidation

There are two primary types of student loan consolidation. It is important to understand how these two options work.

If you have federal student loans, you may qualify for a federal student loan consolidation; however, this type of consolidation does not lower your interest rate or help you save money in any way. Instead, it is sometimes needed to help you qualify for certain federal repayment programs. Federal student loan consolidation can generally be completed in less than 30 minutes. You can start and complete the process entirely online on the Federal Student Aid website.

The other type of consolidation is private consolidation, which requires you to go through a private lender. You will need a good credit score to qualify for a private lender loan consolidation and because you may be able to lower your interest rate, this will help you save money. To consolidate student loans through a private lender, you will first want to compare various lender rates and choose the lender that best meets your needs.

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