Does Refinancing or Consolidating Student Loans Hurt Your Credit?

Refinancing or consolidating student loans can cause a small, temporary drop in your credit score. The dip comes from opening a new loan account — and, in the case of refinancing, from a hard credit inquiry.

Consolidation combines multiple federal loans into one Direct Consolidation Loan through the Department of Education. The new loan is managed by your federal loan servicer (like MOHELA or Nelnet).

Here’s what happens when you consolidate:

• Interest rate: Weighted average of your old loans, rounded up to the nearest one-eighth percent (0.125%).

• Repayment: Multiple loans are replaced with one loan, one payment.

• Options unlocked: Consolidation can open eligibility for Income-Driven Repayment (IDR) plans and Public Service Loan Forgiveness (PSLF).

The main benefit is simplicity: one loan, one servicer, one repayment schedule.

Refinancing is different. A private lender pays off your existing federal or private loans and issues a new loan with its own terms.

Here’s what refinancing typically involves:

• Underwriting: Approval depends on your credit score, income, and debt-to-income ratio.

• Interest rate: Strong borrowers may qualify for lower rates or shorter repayment periods.

• Cosigner: Needed if your credit history is thin or your score is below the mid-600s. Borrowers in this situation may explore refinancing student loans with bad credit.

• Prequalification: Many lenders let you prequalify with a soft credit check, so you can compare offers without hurting your score.

• Prepayment flexibility: Some lenders allow early repayment without penalties, giving you the option to choose a longer term for lower monthly payments but still pay off faster when possible.

• Trade-offs: You lose federal benefits (like IDR and PSLF) when refinancing federal loans.

Refinancing can save money if you qualify for better terms, but it permanently shifts your loans into the private system.

Hard Credit Inquiries

When you refinance, the lender runs a hard credit inquiry (or “hard pull”) on your report. That check can lower your score by a few points for a few months.

Key points about inquiries:

• Refinancing: Always involves a hard pull, which can cause a short-term dip.

• Federal consolidation: Does not involve a hard pull, so no dip.

• Scoring models: Credit bureaus like FICO distinguish between hard inquiries (which affect your score) and soft ones (which don’t).

Credit inquiries are just one part of the broader credit score impact of student loans, which also reflects account age and payment history.

New Account Age

Credit scores factor in the average age of your accounts. Closing old loans and opening a new one lowers that average, which can shave points off your score. The effect is bigger if you don’t have many other credit accounts.

Payment History Carries Over

Payment history is the most important part of your credit score. Refinancing or consolidation doesn’t erase it — your record of on-time or late payments stays. If you’ve had missed payments or default, those marks remain even after you get a new loan.

Refinancing can improve your credit if it makes repayment more affordable:

• Lower interest rate: Reduces total cost and makes it easier to stay on schedule.

• Lower monthly payment: Frees up cash flow and lowers the risk of missed payments.

• Both combined: The strongest path to sustained on-time payments.

Over time, consistent repayment is the single biggest driver of higher credit scores.

Federal consolidation helps in different ways:

• Simplifies repayment: Multiple loans are combined into one.

• Unlocks programs: May open access to income-driven repayment or forgiveness.

• Temporary dip: Creates a new loan, which resets account age but does not erase old credit marks.

For borrowers in default, consolidation is a way back into good standing. The old default mark still appears on your report — that’s part of how loans show up on your credit report and how long student loans stay on your credit report. What changes is that you now have a fresh account to rebuild positive history.

If your goal is to clear the default notation entirely, loan rehabilitation — not consolidation — is the program that removes it after completion.

• Multiple applications: Applying to several lenders one by one can trigger multiple hard inquiries, which drags your score down. Most credit scoring models treat applications made within 14–45 days as a single inquiry. Group your applications within that window to minimize impact.

• During processing: Keep making payments on your current loans until the refinanced loan is finalized. A missed payment still counts as delinquency on your credit report, even if you’re approved for the new loan.

• Loss of federal benefits: Refinancing into a private loan permanently removes protections like IDR and PSLF. The change doesn’t affect your score, but it can cost you financially if you later need those programs.

• Consolidation resets forgiveness timelines: A new Direct Consolidation Loan restarts the clock for IDR or PSLF forgiveness. If you’re close to qualifying, consolidating too soon can wipe out years of progress.

• Thin credit files: Borrowers with few accounts or short histories may see a bigger dip when old loans are replaced by a new one.

Related: How to Dispute Student Loans in Collections

If your goal is to lower your rate and you qualify with strong credit, refinancing may be worth it despite the temporary score dip from the hard inquiry. If you want to keep access to federal repayment options or forgiveness, consolidation is usually the safer path.

Either way, the effect on your credit score is small and temporary. The bigger decision is whether you’re willing to trade federal benefits for possible savings with a private loan.

Here’s how the two options compare: