Consolidating Student Loan Debt With Bad Credit: What You Need to Know
Money & Co

Consolidating Student Loan Debt With Bad Credit: What You Need to Know

Mountains of student loan debt can drastically delay a young adult's ability to get on their feet and start their professional and personal lives with confidence. This is especially true of students that have bad credit on top of their existing student loans. Many become so discouraged by their financial situations that they don't become aware of all of their options. It might surprise you to learn that student loan debt can be consolidated even when the debtor has poor credit. You can even consolidate a single loan. All federal education loans can be consolidated, even when your credit is poor.

Direct Loan Consolidation

This type of consolidation applies only to direct student loans and cannot help those with private student loans. According to Comet Financial, the Direct Consolidation Loan Program enables students and parent borrowers to consolidate student loans without any regard to one's credit score.

An income-driven repayment plan through the Direct Consolidation Loan Program is the way forward for many students with poor credit. This can even be accomplished if your loans have gone into default. The interest rate on these consolidation loans is based on the balance and interest rates of the loans that are being consolidated.

Direct loan consolidation can occur under these circumstances:

  • The loan has already entered repayment.
  • The student is no longer in school.
  • The loans being consolidated are from the same lender.

It is also worth noting that there is no fee to consolidate student loans under the Direct Consolidation Loan Program. If any institution attempts to get you to pay a fee of any kind before offering to consolidate your loans, you are facing a scam and should walk away.

Private Loan Consolidation

If the loans in question are private rather than federal, students looking to consolidate must look into a private consolidation loan. This loan essentially pays off the student's educational debts and issues them a new loan to repay with a different interest. What makes this so different from the consolidation of federal loans is that the applicant's credit score matters. This makes things a bit more difficult for students who have bad credit. The key to solving this problem: A co-signer with strong credit.

Private loan consolidation lenders will often encourage a student (or former student) with poor credit to recruit the help of a co-signer – typically a parent – with a good or great credit score to obtain the loan. Now, this isn't to say that getting a co-signer with good credit will guarantee the approval of such a loan request. Each lending institution has its own criteria regarding who they will and will not do business with.

Consolidating student loans with bad credit is possible, especially so if the loans being consolidated are federal education loans. There are options out there for both private and federal loan recipients, so there's no need to become too discouraged and give up!