It could happen to anyone. You start paying your loans with good intentions, but life happens—maybe you lose a job, get sick or injured, or take a big pay cut—and you fall behind on your payments. Now your credit is trashed.
When you get into a situation like this, you may think that consolidating your student loan payments may be a good strategy to gain control of your finances. And it can be.
The good news is that if you have federal student loans, you can usually consolidate them even if you have bad credit.
The bad news is that consolidating private student loans may be a little harder—but not impossible.
What is consolidation, really?
But before we get in to how consolidation works, it’s important to be sure you understand what consolidation actually is. Many people use the terms “consolidation” and “refinancing” interchangeably, but they actually mean different things.
Consolidation generally only applies to federal loans, which you can bundle through a Direct Consolidation Loan with the U.S. Department of Education.
When you bundle together private loans—or a mix of private and federal—you’re actually refinancing rather than consolidating. When you refinance, a private lender pays off all your individual loans and issues you a single new loan—ideally with a lower interest rate and better terms.
In this article, we’ll talk about how you can do both—even if you have bad credit.
1. Consider a Direct Consolidation Loan
If you have federal loans, you can consolidate those with a Direct Consolidation Loan through the government—even if you’re in default. There are a few key benefits to doing this.
Consolidated loans have a fixed interest rate based on the weighted average of the interest rates on all your loans, rounded up to the closest one-eighth of a percent. If your original loans have variable interest rates, getting a fixed rate is usually a good move.
Consolidating your federal loans gives you the option of paying them through an income-driven repayment plan such as the Income-Based, Pay-As-You-Earn, or Income-Contingent plan. Any of these plans can dramatically lower your monthly payment.
2. Get someone with good credit to cosign
This advice applies to refinancing, not consolidating, your student loans. If you have both private and federal loans, you can refinance both with a private lender.
Refinancing your federal loans with a private lender will cut you off from federal benefits such as income-driven repayment plans. It will also disqualify you from student loan forgiveness programs through the government. However, refinancing with a private lender may result in a lower interest rate—so there are trade-offs.
But if your credit score isn’t great, a lower interest rate can be tough to find. And if your credit is really bad, you may have a hard time finding lenders to refinance with you at all.
Private lenders want to see a good credit history before you can refinance your student loans. If your credit is tarnished, a cosigner with great credit is the fastest way to get around that problem.
Some lenders include terms that release your cosigner after you’ve proven yourself by making regular payments for a certain length of time.
3. Look for a lender with tolerant minimum credit requirements
Student loans are a better bet for lenders than other types of debt, because they can’t be discharged in bankruptcy. That means some lenders are a little more lenient in the credit scores they accept for student loan consolidation.
It’s important to do your due diligence, however, and make sure the lender is legitimate. People with low credit scores are prime targets for disreputable lenders.
See our picks for the best banks for student loan refinancing.
4. Take a look at credit unions
Credit unions are nonprofit banks that often serve a specific community. Because they are not for profit, they can offer better terms and lower interest rates than traditional banks do. Some will refinance your loans even if your credit score is less than ideal.
If you’re interested in exploring your options with credit unions, check out LendKey. LendKey acts as an online portal that helps you search for refinancing options through community lenders and credit unions across the country. It's a highly effective way to view loan offers that might not normally be on your radar screen.
5. Consider peer-to-peer lending
This is a relatively new option, but it may be worth a look if you're unable to refinance with other lenders. Online peer-to-peer lending platforms connect individual lenders and borrowers for both commercial and personal loans.
In some cases, peer-to-peer platforms are less stringent about credit score requirements.
If you have bad credit, you might have to look outside the box to refinance your loans—but it’s still possible. Check out our Student Loan Refinancing Calculator to see how your monthly payments might be affected.