Many student loan borrowers can improve their credit score by consolidating or refinancing their student loans. Unfortunately, this is not a universal outcome as some borrowers might find their credit scores have dropped following a consolidation or refinance.
Despite the significant differences between federal direct consolidation and private student loan refinancing, their impact on a borrower’s credit score are usually similar.
In this discussion, we’ll explore the factors that can lead to an increase in credit scores and the situations in which a credit score might decline. We’ll also cover why credit score changes shouldn’t worry most borrowers or influence their decision-making too heavily.
How does loan consolidation improve my credit score?
When consolidating student loans, several aspects of a borrower’s credit profile changes. According to the credit bureaus, most of these changes improve a borrower’s creditworthiness.
One factor that determines credit score is the number of open lines of credit. Having too many can lower your score. Consolidation replaces multiple student loans with a single new loan. So, although you’ve maintained the same amount of debt, you have reduced your total number of credit lines. This can lead to a higher credit score.
Another way in which student loan refinancing benefits your credit score is that many loans will show up on your credit report as “paid in full”. Unsurprisingly, credit bureaus view a history of fully repaid debt as a positive. Depending upon how the loans are consolidated, your credit report could read that the loans were refinanced, or it could just say that they were paid in full. Either way, your credit score will likely receive a boost.
One final advantage of consolidating your student loans is that it can often lower your monthly payments. Lower monthly payments improve your debt-to-income ratio. This ratio is a key factor lenders consider when deciding whether to loan you money. If you’re looking to buy a home, improving your debt-to-income ratio can be crucial to achieving that goal.
Can Refinancing or Consolidation Cause a Credit Score to Drop?
While it would be ideal for consolidation or refinancing to lead to a predictable change in credit scores, the reality is that outcomes can vary widely.
In some circumstances, a borrower’s credit score can decrease.
The main explanation for a drop in credit score is due to the age of credit. A longer credit history tends to boost credit scores. However, consolidating or refinancing results in old loans being paid and marked as closed. This could negatively impact borrowers with a limited credit history outside of their student loans. Closing old student loan accounts in favor of a new consolidated or refinanced loan can significantly reduce the average age of your credit accounts, potentially lowering your credit score.
Although it is generally a minor factor, checking interest rates for consolidation or refinancing can cause a temporary dip in your credit score. Credit bureaus may view numerous credit inquiries as a signal that a borrower is experiencing a financial distress, making the borrower appear to be a higher credit risk. However, credit bureaus typically bundle inquiries from rate shopping within a short timeframe as a single inquiry, minimizing the impact. So, borrowers are still encouraged to check rates with many lenders in order to get the best deal.
Ultimately, most borrowers will likely see a small increase in their credit score following consolidation or refinancing. Yet, as some readers have experienced, there is also the possibility for a credit score drop.
Nevertheless, changes in credit score shouldn’t be a major concern when considering consolidation or refinancing, as the benefits of these actions often outweigh the temporary fluctuations in credit scores.
Most People Shouldn’t Worry About Their Credit Score when Refinancing
The desire to improve and protect a credit score is responsible, but it shouldn’t be the primary concern.
A high credit score’s real value lies in the ability to secure favorable lending terms. In other words, the value of a good credit score is the chance to save money.
The main goal of consolidating or refinancing student loans is precisely that – to save money. If your credit score is already sufficient to secure a low interest rate or advantageous repayment terms, then it has served its essential purpose.
Refinancing or consolidation has the potential to save you hundreds of dollars per month and thousands of dollars per year. With that much money at stake, worrying about what Equifax or TransUnion thinks might not be the best use of your time and energy.
However, an exception exists for those planning to buy a home soon. Even a fractional difference in mortgage interest rates can have a substantial financial impact over time. If you’re in this situation, it’s prudent to consult with a lender or mortgage broker before making any moves that could affect your credit score. These housing finance professionals can advise on the wisest course of action, helping you balance the benefits of loan refinancing or consolidation with the necessity of maintaining a good credit score for a home purchase.
The Bottom Line
Most borrowers should see a slight improvement in their credit score after refinancing or consolidating their student loans. However, it’s important to recognize that, for some, credit scores could temporarily decrease.
What’s crucial is the financial outcome of refinancing or consolidating. If these actions lead to cost savings, a temporary fluctuation in your credit score should be of minor concern. The primary goal is to enhance your financial situation; if achieving this goal results in a minor and temporary dip in your credit score, it’s generally worth the trade-off.
Have you consolidated your student loans? What tips or advice would you offer? Please leave your thoughts in the comments section.
In some cases combining federal with private loans in a private consolidation is not a bad idea.
The important thing is that you the borrower realize the federal perks that you are giving up: such as income based repayment plans and student loan forgiveness.
If you are in a situation where you will definitely be paying off your federal student loans as fast as possible and an in full, and the only question is how much interest you will be paying on your way to a zero balance, then private consolidation could be a great option. (Just be sure to shop around to make sure you are getting the best rate: https://staging-studentloansherpa.kinsta.cloud/student-loan-reviews/
In most cases consolidating many loans into one new one will help your credit score, but depending upon the age of your loans and some other factors, it is possible that it goes down.
However, the consolidation decision really comes down to dollars and cents. If you can save money by doing it, it is a good idea. The credit score change in either direction is slight.
You certainly don’t want to consolidate just because it might help your credit score… it should only be done if it will save you money.
There are definitely a lot of scams out there and a ton of mistakes that can be made. We’ve prepared a long list of companies and reviewed them here: https://staging-studentloansherpa.kinsta.cloud/student-loan-reviews/
Hopefully you can use this tool to separate the good options from the bad and use your good credit to get lower payments. Just make be careful with refinancing because it means giving up a lot of perks with the federal loans and there is no way to undo it.
If you are interested in purchasing a home, you will probably want to get the defaults addressed first. As I understand it, there are basically two routes you can go. You could consolidate immediately, or rehabilitate your loans first. There are pros and cons to each approach. I’d suggest chatting with your loan servicers about your options and then discussing those same options with a local mortgage company. Some mortgage lenders will have great advice on repairing your credit to get you eligible for a home loan.
This is a tricky question that depends upon the type of loans you have. Federal student loan consolidation, when done through the federal government, does not help your interest rates (they actually use a weighted average), so there wouldn’t be any advantage to consolidating one federal loan.
However, private loans are a different story. If you have private loans and you want to consolidate just one, you could lock in a lower interest rate. In this case, it would technically be called refinancing rather than consolidating, but the process is similar.
Does that make sense?
Alex, your question is somewhat complicated as there are a number of factors to consider, but it is a great question. I’m actually going to make it the next article for the website. Hopefully I can get a full response ready by Sunday. Thanks again for your great question!
Hello. I have 3 Grad school PLUS loans (1 subsidized, two un) from .gov with current balance of $32-33k. Started in 2011…was laid off in 2012 where I have two old deliquent remarks…but been paying everything on time current for the past 4 years. Credit score is between 730-775 depending on bureau and i have one medical bill on each (in dispute). Paying $572/month…with weighted avg 7.5%. SOFI prequalified me for 3.5+….i have total job security and my income ($110k right now…and going up as we expand)….so main thing for me is I want payment down…and I see 10yr option at $335/month saving me $240/month and if i just did that…it would still come less…but i expect to do a total payoff of balance prob within next 18-24 months. That being said…am I better off doing a long loan, low payment since i get more cash on hand now kowing ill pay it off…or is safest the 10 yr $335? How picky are they once I submit paperwork and they run credit report? THANKS!!!!
There really isn’t a right answer or a wrong answer to the repayment length question. The shorter the loan term, the lower your interest rate will be. However, as you note, the longer repayment offers more flexibility.
One thing to keep in mind is that regardless of what length you pick, you always have the option of paying extra to pay it off much faster.
Are their any other financial goals that you have coming up? You should consider how these options affect your ability to buy a house or save for retirement.
This is not true…. I got a notification today that my score dropped 48 points! I’m pissed because I’ve been working diligently cleaning up my credit. My debt to income ratio is very low. I also keep my credit utilization very low. I pay down my card (which I hardly use) and it at 10% utilization. I’m so mad.
I am current with my two federal loans now but when I first got out of school 2013-14, I was young and stupid and didn’t pay and I have multiple 90day missed payments. I would like to consolidate the loans to mark them as paid and get that off my report! Is this possible?
Since I checked this page while deciding I thought it fair I come back and update. I consolidated with all my loans in default, many sold to other companies only adding more negatives and a garnishment order pending. Once the new loans came on my score went up. The old loans still don’t show as paid or 0 balance but just having one extra account in good standing, technically 2 as the sub and unsubsidized are considered seperate loans. Tu went up like 80 points, Equifax bout 23 bringing each just under 600. I financed a car 6 months ago with a 23% rate for 6 yrs and was able to refinance days after the loan hit my credit report for a 14% loan for 4yrs saving 12k on interest but really allowing me to get that paid off much quicker. I am so happy I consolidated instead contacting all the seperate companies and setting up rehab but I had really let my situation go too far.
My score went down. It closed the old account that had ontime payments for 3 yrs and opened a new one that now only has 2 months of history. Now my oldest account is only 2 months old so my score dropped. Wtf
Mines did too. 48 points!!
Hi. I have a total of 31,000 in subsidize and un subsidize loans originally with sallie Mae and now navient. All in good standing. Just purchased a car and my credit came back at 815. I get calls to lower my payment every day but I’m scared of scams. What should I do?
So combining federal and private is a no-no. Here’s my dilemma, I have about $7,500 in federal loans at 6.55% with 3 years remaining, and I have about $18,000 in private loans at call it 4% with 8 years remaining. If I lump those all together into one of Citizens new consolidation loans with a 5 year payoff and 2.13% , that will put me at a $445 a month payment, with WAY less interest… (Score is 780)
So in my situation, is combining still a terrible idea? Even with my federal loans being a such a high interest rate (compared to what is being offered)?
Right, I don’t qualify for the income based repayment plans, and while I do qualify for the loan forgiveness, my federal loans are on a 10 year payoff schedule and the forgiveness only works AFTER 10 years, if I had known that at the start I would have refinanced them out to 30 and accelerated the payoff of the private loans. As it stands now, I will pay off the federal loans before I can get them forgiven. (As far as I can tell that is.)
I have loans with navient & edfinancial, would consolidating them hurt my credit? Currently it’s listed as 10 separate accounts
Hi, I have a credit score of around 590 according to Credit Karma at least. I’m looking to improve my credit to buy a home and have paid off nearly everything on my credit report. The only negative things remaining are the past payment historys on my student loans which are federal, 9 total I believe. They have been current for about 5-6 months. My question is, will my credit score improve by consolidating those loans or will it go down because of the consolidation? I’ve seen people post instances of both. Thank you!
This all seems like great advice, and I thank you for answering what was absent in the FAQ of the studentloans.gov site. I do have one concern, as I am still learning how my credit score is calculated. I have excellent credit, but I am trying to qualify for a building-perm loan (essentially a mortgage) and all of my wife’s student loans came out of deferment, as she is all done with school and has been working in her field for over a year. I know that new lines of credit or new loans affect your credit score, so my concern is in regards to any negative side effects of consolidating all 17 of her Dept of Ed loans. Does this new consolidated loan actually count as a new loan, and as such affect my credit score negatively, or does it look like I am paying off student loans which will give my score a positive bump?
I hope I asked the right questions and provided you with enough background without being too thorough. And also, your blog post needs a slight update as the loanconsolidation.ed.gov site seems to be phasing out and being replaced by studentloans.gov. Thank you again for your great advice!
Hi. I have several student loans and they have defaulted. These are federal student loans and I’m wondering if consolidation is right for me. I do not work as I’m caring for my new born twins. My husband is the sole provider and we have had federal offset already. Will consolidation stop federal offset? And will filing for consolidation Hurt my credit score. Can it help us purchase a home? Please help.
Consolidation will pay in full your defaulted federal student loans and give you a new loan with a clean slate, thereby ending the Treasury offset. In order to consolidate federal student loans in default, you must agree to enter an “income-driven” repayment program, of which you have several options. These income-driven repayment programs generally do not require a monthly payment until the borrower’s income exceeds 150% of federal poverty guidelines, which are adjusted for inflation annually. You can consolidate only once so it’s important to keep required payments (if any) current and to avoid another default. Getting your original defaulted loans paid off will improve your credit score far more than the small ding of pulling your credit report when you apply.
Hi, I currently have a student loan with Navient. I have about $11, 400.00 I owe on my student loan. I am currently making one payment that is being split into 3 and paying 3 different loans. Also they are charging me interest for all three loans. Would it be best to consolidate my loans all in one now? Will that make my what I owe go up?
Federal Loans are way worse than Private loans. If you have a Federal loan like Sallie Mae- Navient or any other government backed place they have you for life my friend. If you file bankruptcy they can keep sueing you all the way until your 99 years old for the money you didn’t pay back.
On the other hand if you have private loans and file bankruptcy they have a 7 year window time frame to file a suit against you. So if you are planning on not paying them back do not consolidate to federal loans EVER.!!!
I consolidated my federal student loans and my credit score went up 100 points!
Wow. What was your previous credit score ? I consolidated about a month ago & I’m hoping for the same results . Credit score currently stands at 540.
How much increase in credit score did you get after consolidating your Federal Student loans?
How fast did thr score go up? Was it soon?
Less than a month. I was in the 500s
Oh okay cool, well I have private loans through Navient I hope for the same results
My score dropped 48 points today.
I am in default and want to fix the situation but I am torn between consolidation and rehabilitation. The debt collector is pushing rehabilitation but the payments are so high. But then I started thinking of the consolidation route. What do I do?? I have about 17k between subsidized and un subsidized stafford loans.
I have a student loan that shows up on my credit record as 4 Dept of Ed/Sallie Mae accounts. When I pay them, I just send a single payment to Sallie Mae that splits among them. Would it be wise to consolidate these loans? I’m in the military, so I know getting low interest rates wouldn’t be an issue. How much would this help my credit score? Besides this, all I have is a $3900 auto loan and a $1000 credit card balance which shall both be paid off very soon.
Oh crap, so Sallie Mae is a private loan lender? And how can you distinguish between Federal Loans and Private Loans?
If I decide to consolidate, I believe that I can choose the loans to be included, right? All of of my loans are federal loans except one thru Sallie Mae that my parents co-signed for. I’m paying a stupid 9.25%. I am almost half way thru paying the $14k loan. Is it still a good idea to “consolidate” just one loan, and leave the FedLoan loans?
Hi Michael, thank you for this information! I have a question. I have negative credit reporting from the US Dept. of Ed. from loans I did not pay when I graduated college. Since then (2-3 years ago), my loans have been “sold” to other lenders. I have been in good standing with those, and have positive reports from those (5 loans total) on my credit report. I am wondering if I consolidate, will the US Dept. of Ed. loans be removed from my report, or is there a way they must have this removed? I know they can be removed in 7 years from the date they were sold, but I want their report gone. Can you help? -Hillary
This is a great question. I am also curious.
They were probably never sold, as the Dept. of Ed retains ownership but transfers loans from different servicers. The only lender is the Department of Ed. It’s unlikely you can get the default notation removed (if that is what you are referring to) before 7 years without using what is known as Rehabilitation, an option that would only be available if your loans were still in default.
Rehabilitation will remove the default notation after the 9 month repayment period to bring the loans out of default. But if you are current now, this wouldn’t be an option.
Amazing advice and exactly what i was looking to find! so glad all my student loans are federal loans making the process much easier!! Also, thanks for the credit info was kind of curious about that!
I was lucky. First my loan amount was not astronomical (about $25,000), and second I bought a house before the bubble. When interest rates started to decline, I refinanced with a cash-out to pay off the student loan. I reduced the rate I was paying from 9.0% per annum to, I think, 4.5% (at the time). I’ve since refinanced down to 2.625%. Obviously, not everyone can do this, but it is one method.
That is a great method. Saving over 4% on a 25k loan is awesome. Well done!
I consolidated my loans while still in school…I think it was around 2006 or so when student loan interest rates were really low. It was a no brainer…the portion I was able to consolidate is about 2.5% It appears all graduate student loans are fixed at 6.8% nowadays. Also, I wasn’t in a rush to buy a house (as if I’d have the money) back then so while my credit score is important to me…I didn’t worry to much about it in terms of the affect of consolidation.
2.5% That is amazing! I would love to find a rate that low. Well played Andrew.
This is excellent Michael. Forwarding to my daughter who is a junior in college. Her boyfriend and many of her friends are seniors or recent grads and they all need this information.
A lot of kids don’t even know how much debt they are in until they are close to graduation. Parents handle all of the financial dealings with the university and kids find out shortly before they graduate just how bad things are.
Thanks Betsy! I am happy to help out. The earlier we can get this information to people the more money they can save. I wish someone would have sat me down and taught me all the essential information about student loans before I went off to school.
Hey Michael, I found this info to be very informative. As someone who currently has a small amount of loans this is very beneficial to me.
Thanks Brett! I’m glad I could help.
We consolidated immediately, but that was so long ago that I don’t know what kind of impact it had on my credit score.
But I do remember getting a rate somewhere between 4-5% which didn’t feel too abusive at the time (2003-2004).
I had to consolidate immediately as well. I had FFELP loans and in order to get them eligible for public service loan forgiveness I had to consolidate. It can be a pain to go through, but I did notice a nice little bump in my credit score.