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How Student Loan Consolidation Affects One’s Credit

How Student Loan Consolidation Affects One’s Credit
Brian O'Connell
Brian O'ConnellUpdated January 3, 2025
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For those struggling under the burden of student loan debt, loan consolidation can offer some relief. By bundling multiple federal student loans into one new loan, it’s possible to make monthly payments more manageable and streamline repayment. However, some borrowers may wonder: How does student loan consolidation affect credit score?The good news is that consolidating student loans can help your credit score in the long run. The bad news: It’s possible that consolidating student loans can hurt your credit due to the hard inquiry required to secure a new loan.If all of that sounds a bit confusing, we’ll break down the effects of student loan consolidation on credit score so you can determine if consolidating your student loan debt is a good idea.Recommended: Student Loan Consolidation Guide: What You Need to Know

What Is Student Loan Consolidation?

Student loan consolidation is the process of combining multiple federal student or parent loans into a single, larger loan. Once the loan is approved and the borrower’s student loan debt is consolidated into the new loan, the borrower only has to make one monthly payment on the consolidated student loan. It’s important to understand consolidating as it relates to private vs. federal student loans. Only federal student loans are eligible to consolidate through a Direct Consolidation Loan. Doing so may offer a lower monthly payment through a longer term, but not a lower interest rate. Be aware that consolidating could lead to losing benefits, such as interest rate discounts and setting you back on progress made toward loan forgiveness.Private loans are not eligible to consolidate through a Direct Consolidation Loan. Instead, you can combine your private student loans as well as your federal loans through refinancing with a private lender. This could allow you to secure a lower interest rate or lower monthly payments through a longer loan term. Note that refinancing federal loans will result in losing access to federal benefits, such as loan forgiveness programs.

Will Consolidating Student Loans Lower My Credit Score?

Consolidating student loan debt does have the potential to lower your credit score. This is because debt consolidation requires a new loan. As such, the loan servicer is likely to do a hard pull on your credit report in order to assess your creditworthiness. This can lead to a small dip in your credit score. However, this drop is temporary and will likely only last for a few months.Additionally, as is the case with any loan, consolidating could lead to a drop in credit score if you fail to make payments on time.

Is Consolidating Student Loans a Good Idea?

Whether student loan consolidation is a good idea depends on the particulars of your situation. Here are some examples of when consolidating student loans can make sense:
  • You’re overwhelmed by multiple monthly payments. One of the big benefits of student loan consolidation is that you’ll simplify your multiple loan payments into just one loan payment per month.
  • You want lower monthly payments. Debt consolidation can help lower your monthly payments by extending your loan term to up to 30 years. Just keep in mind that you’ll pay more in interest the longer your repayment timeline is.
  • You want to get on a repayment plan. Consolidating federal loans can allow you to gain access to additional income-driven repayment plan options or Public Service Loan Forgiveness. 
  • You’d like to switch to a new federal loan servicer. If, for whatever reason, you want to switch federal loan servicers, student loan consolidation can allow you to make the change.
  • You want to get loans out of default. If your loans are in default, consolidation can help you get them back in good standing. This will then allow you to qualify for payment relief if needed.
While the upsides might seem rosy, it’s also important to weigh what you stand to lose through student loan consolidation. You might not see drastic effects to your credit score from consolidation, but you can lose interest rate discounts, principal rebates, and loan cancellation benefits.Additionally, a Direct Consolidation Loan will not lower your interest rate — and it could even increase it. A longer loan term will also result in paying more interest over the life of the loan. Plus, any unpaid interest may get capitalized and added to your new loan’s principal.

Other Options Besides Student Loan Consolidation

While student loan consolidation is a useful tool for student loan borrowers looking to make paying off student loans easier, it’s not the only loan management option available. Here are some others borrowers might consider as well.

Student Loan Deferment

With student loan deferment, borrowers can temporarily stop making payments on their student loans without the consequences of default or credit damage. Through this federal repayment program, it’s possible to hit pause for up to three years, freeing up money for other expenses. Whether you’re responsible for the interest charges that accrue on your loan during this period depends on what type of loan you have. You typically won’t have to pay interest for federal direct subsidized loans. With unsubsidized federal loans, you will, which means your loan balance will grow during deferment. It’s necessary to request a deferment if you need it. There are a number of reasons you might be eligible, including unemployment and economic hardship.

Student Loan Refinancing

Another option to explore is to refinance student loans, which is when you combine several loans into one with a private lender. Unlike the federal consolidation program, refinancing can result in a lower interest rate if you have strong credit. Refinancing can also allow you to choose new repayment terms, making it possible to adjust how much you pay each month. It’s possible to refinance federal and private student loans. Just keep in mind that making federal loans private will result in losing access to federal protections.

The Takeaway

Whether consolidating student loans is a good idea depends on your goals. The good news is that you don’t have to worry too much about how student loan consolidation affects credit score. Though you might see a dip from the hard credit inquiry, the effects should not be significant and they are temporary.If you are hoping to secure a lower interest rate or different length of payment, you might consider student loan refinancing. Be aware if you refinance that you will lose access to all government forgiveness programs.Find and compare multiple student loan refinance options with Lantern.

Frequently Asked Questions

What are the disadvantages of consolidating my student loans?
Will consolidating student loans be bad for my credit score?
What else can I do besides consolidate my student loans?
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About the Author

Brian O'Connell

Brian O'Connell

Brian O’Connell is a freelance writer based in Bucks County, Penn. A former Wall Street trader, he is the author of the books CNBC's Creating Wealth and The Career Survival Guide. His work has appeared in multiple media platforms, including TheStreet.com, Bloomberg, CBS News, Yahoo Finance, and U.S. News & World Report.
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