GRADUATING IN 6 MONTHS - DO I CONSOLIDATE MY SL'S

[ALLGOOD351]

Hello Everyone,

I am getting ready to graduate from college in 6 months with approx. 45,000 in SL debt, all Federal Loans. My credit report shows each time I took adistribution of student loans, so there are 14 individual lines of SL's.

My question is, should I consolidate all of these loans to get the lowest payment available? Not sure what to do.

Thanks for the help in advance 

[Anonymous]

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@ALLGOOD351 wrote:

Hello Everyone,

I am getting ready to graduate from college in 6 months with approx. 45,000 in SL debt, all Federal Loans. My credit report shows each time I took adistribution of student loans, so there are 14 individual lines of SL's.

My question is, should I consolidate all of these loans to get the lowest payment available? Not sure what to do.

Thanks for the help in advance 

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If they are all fed laons, they will calculate the payment based on balance regardless of if they are all seperate or consolidated. I would not consolidate, as you will still make one payment whether they are seperate or consolidated. There will be no cost difference.

[ALLGOOD351]

@Anonymous 

Just curious as to why you say do not consolidate the loans?

Im learning and I like to hear other perspectives.

[ccquest]

Because the overall payment amount will be generally the same regardless and by not consolidating, you can target any over payments towards whatever loan is the highest interest rate yourself.

Plus if you consolidate you'll be getting another new account on your credit report (if you care about that).

Only reason I can see to consolidate is if they are under different servicers for some reason, another would be to "trick the system" and get by an extra couple months with no payments - but that might not be a concern when you enter repayment if the current "bonuses" get extended.

[calyx]

Consolidation is very good if you have trouble paying the multiple loans (if you have separate servicers, for example), or if you have older FFEL loans and want to qualify for any of the forgiveness programs.  Or if you have defaulted from student loans after going through a rehab previously (defaulting a second time - I've done it, don't recommend).

Consolidation is not great for long term credit file building.    Since student loans tend to report in multiples (due to each semester/time-unit reporting as separate loans), someone could easily end up with 4, 5, 6...12 or whatever student loans with a really long history, which helps make your report less susceptible to drops in the aging metrics that determine your score (6 loans that are 7 years old help buffer better than, say 1) if you open new tradelines (credit or installments).   If you can keep up with your loans (as in, not go delinquent), it makes for a nice, thick file.    Also, loan amounts/utilization doesn't really factor heavily into FICO scoring, so it doesn't hurt you to have a bunch of money owing on 1 vs many loans (like it does with credit lines).

The downside is that if you do get derogatories reporting, it'll be a lot of them instead of one.    

The amount owed and the amount you ultimately pay out doesn't change unless you are paying lower amounts as it means more time and therefore more interest paid over the life of the loan.    The consolidation interest will be a weighted average, which is why consolidating won't necessarily save you money (exception is if you're consolidating from a high interest private loan to a lower interest one, of course).

I don't recommend consolidation, but honestly, whatever ultimately works for you is what will be the best choice.    

[ALLGOOD351]

I am working toward eventually buying a home. I have had several mortgage underwriters tell me I need to put all my  loans into a consolidation. The underwriter told me most banks that underwrite would rather see one line account rather than 12 accounts. Anybody care to weigh in on this?

[Anonymous]

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@ALLGOOD351 wrote:

I am working toward eventually buying a home. I have had several mortgage underwriters tell me I need to put all my  loans into a consolidation. The underwriter told me most banks that underwrite would rather see one line account rather than 12 accounts. Anybody care to weigh in on this?

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This does likely not remove the accounts from your credit reports and instead adds another one. I find it odd that they suggest this, as it literally changes nothing and a thick credit file is often more favorable than a thin one. I see no benefit to it unless it somehow lowers your payments and I do not see how this would benefit you in terms of applying for a mortgage.

There are plenty of misconceptions that having less on your credit profile is better, so people often try to remove positive and closed accounts, when in fact it does quite the opposite. This lowers your average age of accounts and in turn, likely your credit score. Also, it is next to impossible to remove positive and closed accounts, as there is no basis to, they are accurate and they happened. This is what builds your credit profile.

Consolidation of your student loans means a new credit line on your credit reports and lowers your average age of accounts and possibly your credit score. It is generally said you do not want any new tradelines on your credit report within a year of a mortgage, so consolidation of your SLs is strongly discouraged if you are applying for a mortgage soon. Also, if you have paid on them at all, your utilization will go instantly to 100% with the consolidation, so if you have paid on your current SLs, it may actually increase your utilization and possibly lower your credit scores.

I really see zero benefit to consolidating exclusively for a mortgage application. I would shop around for other lenders if this is what the one you are looking at is telling you.

[calyx]

To add on to what LaHossBoss said - adding a new consolidation loan will also reset your "age of youngest account" metric and FICO mortgage algorithms react pretty badly to those.      Those scores are a older, more conservative, and the mortgage lending industry heavily relies on them to set rates, so I would DEFINITELY recommend against consolidation.

Anectdotally, I have a hard time believing underwriting would put that much stock in, say, owing 100k in student debt on one line vs owing 100k in student debt across 5.    The debt amount doesn't change, and with various programs for paying back the loans, managing your DTI won't be any easier/harder with consolidation (this would not be true if you had FFEL or older loans). 

[ccquest]

Only way I can see the one open line being better is a lazy evaluator. Ultimately it's just totaling up your monthly debt obligation and that will be (very close to, if not exactly) the same either way.