credit score

How does consolidating student loans impact your credit score and credit report in general. Is it wise to consolidate? What are the drawbacks in terms of your credit worthiness?

Answering this question is a complex one. Without all the facts the advice here should be only considered as a starting point. Generally speaking whenever you talk about debt consolidation, it is almost always has a negative repercussion on your credit score simply especially if the current lenders are consolidated with less than the original loan amount. In the long term however, you should see a positive effect on your credit report since you will hopefully have a smaller debt to income ratio, it is easier to make payments on time and you will have far less of number of credit lines on your credit report.

Exploring student loan consolidation is wise if you are having trouble making payments but keep in mind that if you do consolidate you might lose certain benefits such as loan deferment and loan forgiveness in certain cases such as the Perkins Loan. You have to weigh all the pros and cons before you decide on consolidation. As far as your credit report is concerned, without all the facts in front of me, I would say yes there will be some negative effects in the short term but if a student loan consolidation is going to keep you afloat then your long term credit report will end up looking good.

Below are some of the typical questions we get around this subject (all personal information removed)

• “Can I consolidate my student loan without affecting my credit?”
• “How is debt consolidation going to affect my credit score?”
• “Is there a way to consolidate my student debt without impacting my credit score?”
• “What is the best way to consolidate my past loans so that I can have a clean credit report and avoid lowering my credit score?”

Consolidating your private student loans or any student loans for that matter can make financial sense if you get a better rate of interest and your term of the loan remains unchanged or better is reduced. This is a crucial factor in deciding if consolidating your loans is worth it and if it makes financial sense.

If however your consolidating company offers to lower your monthly payments but increase your repayment term then purely from a financial perspective this does not make it a good deal for you. You don’t know have to know much about loans to understand what this means – the longer you stretch your repayment, the more interest you pay on your loan.

For the sake of argument, let’s assume that you are hoping to consolidate $30,000 of private loans that will enter a 10-year repayment at 8.9% interest. Right now, you would be looking at 120 payments of $378.41 a month. Consolidate that $30,000 into a 20-year loan at the same interest rate, and your payment drops to $267.99 a month – a savings of $110.42 a month. I’m sure you could put that extra $110 to good use.

But here’s the catch – over 10 years, your total payments will be $45,408.36. How’s that compare to 20 years, where your total payments will be $64,318.53?

What’s the privilege of cutting your monthly payment by $110 going to cost you? $19,000. Wow, that’s the list price on a Honda Civic, a Mini or a Pontiac G5.

Make that same deal on your government loans, and you’re looking at another $15,000 in extra interest. That’s quite a lot to pay. Before you consider consolidation, take a look at your lender’s other options, including Income Contingent Repayment, extended repayment, graduated repayment, and the brand new Income-Based Repayment. Do the math, and see which of these might make the most sense for you.

Don’t be in a hurry to consolidate or consolidate for the sake of it, there are several options available to you and unless you do your due diligence, it will prove to be a very costly decision.