Student Loan Round-up

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The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please ask an expert.

This week is a round up of two of the #AskanExpert questions we received on the topic of student loan repayment.

Question 1. I have been paying on my graduate school student loans since 2004. My FSA account says I have 11 loans with one servicer. They are all Direct Subsidized and Direct unsubsidized loans. When they are already under one servicer (I only make one payment per month), is it beneficial to consolidate these loans? Would I be paying less interest if they were consolidated? Right now, I feel like I’m getting nowhere with my payments. Thanks for any advice.

There are several pros and cons associated with Direct Loan Consolidation, but ultimately the outcomes depend on your specific situation, repayment capabilities, and financial goals for the future. When you consolidate your loans under Direct Loan Consolidation, you can choose among several repayment plans that may lower your monthly payments by extending the repayment period and having you pay more interest over time. You’ll also be able to access benefits such as forbearance and to get out of default if you were to lose your job.

On the other hand, consolidating your loans won’t necessarily reduce your interest rate. The rate is calculated by taking the weighted average of the interest rates on the consolidated loans, rounded up to the nearest 1/8 of 1%. And you will lose whatever benefits your individual loans have right now. The good news is that you don’t have to include all your eligible loans in the consolidation. However, you only get one chance to consolidate your federal loans. If one of your main goals is to repay your loans faster, consider talking to an NFCC Certified Student Loan Counselor to help you review your options and develop a realistic repayment strategy.

Question 2: If one owes $80,000 in student loans would paying off a portion of the loan positively impact your credit score, or would the whole loan need to be paid off? If yes, a smaller portion of the loan being paid off would help, how much of a payment would be needed to affect the score?

Paying off some of your student loans may not have the effect you expect on your credit score. Your score is influenced by your payment history (if you pay on time or not), your credit utilization ratio (how much you owe compared to your available credit), how long you’ve had credit, the types of credit you have, and how often you ask for new credit.

Installment loans, like student or car loans, help you boost your score over time by establishing a positive payment history, if you make your payments as agreed. These loans also impact your score by helping diversify the types of credit that appear on your credit report. However, the balance on your installment loans is not used to calculate your credit utilization ratio, which is one of the main factors influencing your score. The utilization ratio is calculated using the balances on your credit cards divided by your available credit. So, owing less on your student loans, most likely won’t have any impact on your score. Furthermore, paying them off could have a temporary negative effect on your score.

If your main goal is to increase your credit score, take a different approach–review your credit and find ways to improve it. Generally, paying on time, keeping credit card balances low, and getting new credit sporadically will help you increase your score over time. For a personalized strategy to boost your score, consider talking to an NFCC Certified Financial Counselor from a nonprofit near you. Your counselor can review your credit report and help you find the best way to reach your financial goals.