Key takeaways
- A poor credit score could make refinancing your student loans difficult, or you may only qualify for a new loan with subpar terms.
- A credit score of 650 or higher is optimal for most lenders who offer student loan refinances.
- If you can get a better interest rate, change your loan term or consolidate several loans into one, refinancing could be beneficial.
- Conduct a cost-benefit analysis and explore alternatives if you find that refinancing your student loans isn’t the right choice.
Student loan refinancing is the process of taking out a new loan with a private lender and using it to pay off your existing student loans, often to get a better interest rate. If you have bad credit, however, refinancing your student loans through a private lender may be challenging. Some lenders will charge you more, while others might deny your new loan application outright.
Each lender decides for itself what it considers a bad credit score. If your FICO Score is below 580, a lender may consider your credit score to be “poor.” A FICO Score between 580 and 669 is “fair,” and it might still give you problems when you apply for financing. However, even with credit challenges, some student loan refinancing options may still be available to you.
Every lender uses different criteria to determine borrower eligibility and interest rates. With less than stellar credit, you may find that if you qualify to refinance your student loans, the rates available are higher than what you are currently paying. Lenders MEFA and INvestEd consider applicants with a credit score of 670 or higher, so even if you are rebuilding your credit, you may still apply to refinance.
What credit score do you need to refinance student loans?
Lenders often consider their credit score requirements proprietary information, so it’s hard to pinpoint an exact credit score requirement to refinance loans. As a rule of thumb, anything over 650 will likely give you your best shot at qualifying.
Even if you meet the minimum requirement, you’ll face higher interest rates with poor credit. You might qualify, but your interest rate could be in the double digits.
If lenders don’t advertise their credit score requirements, get prequalified with a few companies. This will give you a sense of where your credit score puts you in terms of eligibility and interest rates.
Is it worth it to refinance your student loans with bad credit?
Refinancing isn’t the best move for everyone, especially if you have bad credit. That said, there are situations where refinancing your student loans could be worth it.
How to determine if refinancing is worth it if you have bad credit
You could save money by refinancing, even if your credit score is on the lower end. Here’s what to consider to determine if it makes sense.
Better interest rate
If your credit score is low, a slight improvement since you took out your current loans could mean a better interest rate than you’re currently paying. You can gauge your eligibility for more attractive loan terms by getting pre-qualified with other lenders. Many let you check your approval odds and potential rates online with a soft inquiry that doesn’t impact your credit score.
Different repayment timeline
Another potential upside of refinancing is the ability to get an extended repayment period. Even if you don’t qualify for a more competitive interest rate, your monthly payment will likely be more affordable since you’re stretching the balance out over a longer period.
However, this approach isn’t without downsides, as the lender will have more time to collect interest from you. In exchange for lower monthly payments, you can expect higher borrowing costs over time.
Change lenders
Whether you have a federal or private student loan, refinancing to change lenders may also be viable to take advantage of special incentives or bonus offers. Refinancing federal student loans with a private lender means losing valuable benefits. The advantages of refinancing should outweigh the costs for you.
Consolidate multiple loans
Refinancing is an ideal way to streamline the repayment process if you’re struggling to manage your student loans. By consolidating, you’ll get a single monthly payment instead of juggling several payment amounts and due dates each month. Plus, avoid late payment penalties, missed payments and adverse credit reporting by enrolling in automatic payments with the new lender.
How to refinance student loans with bad credit
Refinancing student loans can be a great way to save money on your educational debt. Yet many private lenders require a minimum credit score in the mid-to-high 600s to refinance your student loans. Try these tips if you’re worried your score won’t reach this threshold.
Apply with a co-signer
Adding a loved one as a co-signer on your loan application might help you qualify to refinance your student loans when you have credit issues. Of course, your co-signer needs good credit (or better) for this approach to work. If your co-signer’s credit is good enough, they might help you secure a lower rate and better loan terms.
On the negative side, co-signing could backfire for your loved one, as it puts their credit reports and scores at risk. If you can’t repay your refinanced student loan as promised, your co-signer’s credit will suffer as much as yours from late payments or loan default.
A co-signer is also liable for the debt — just as much as if they were the sole borrower. Even if you always pay on time, the co-signed student loan on your loved one’s credit reports might make it difficult for them to borrow again in the future.
Improve your credit score
Credit scores aren’t the only detail that lenders consider when you apply for a loan. But they’re certainly among the most important factors.
Working to improve your credit score before you apply to refinance your student loans is smart. Here are some potential ways to give your credit score a boost:
- Check your credit reports for errors. You can claim a free credit report from each credit bureau via AnnualCreditReport.com weekly. If you discover inaccurate information on these reports, you can dispute it with the appropriate credit bureau. Negative, inaccurate data on a credit report can hurt your credit score, so you should never ignore this problem if it happens to you.
- Always pay your bills on time. You can set up automatic payments and schedule reminders on your smartphone to help. Payment history is worth 35 percent of your FICO Score.
- Reduce your credit card balances. Your credit utilization ratio (aka your balance-to-limit ratio) has a big impact on your credit scores. Paying down credit card balances will generally lower your utilization rate and may improve your credit score by extension.
- Add alternative credit to your reports. Programs like Experian Boost allow you to add certain types of information (like a mobile phone or utility account) to your credit reports. If you regularly pay these bills on time, adding them to your reports might be good for your scores — especially if your credit files are thin and you have few other accounts.
Shop around with lenders
Anytime you need to borrow money, shopping around for the best deal is a good idea. Comparing offers from multiple lenders has the potential to save you a significant amount of money over the life of your loan.
Some private lenders will allow you to check your interest rate with only a soft credit inquiry. This loan preapproval process is great because it lets you compare multiple refinancing options without any potential credit score damage.
Improve your cash flow
Lenders often consider your debt-to-income ratio (DTI ratio) when you apply for a new loan. DTI compares the income you earn each month (pretax) versus your total monthly debt payments.
Lenders will hesitate to loan you more when you owe too much money compared to your income. But if you can improve your cash flow — by paying down debt or earning more money — you may be in a better position to qualify for student loan refinancing.
Alternatives to refinancing student loans
Student loan refinancing isn’t the right fit for everyone. If bad credit keeps you from refinancing or prevents you from getting a lower interest rate than you’re currently paying, an alternative approach may be best. Some options include:
- Consolidate your federal loans. A Direct Loan Consolidation combines your federal student loans into a new, individual account. You can extend your repayment period and lower your monthly payment while retaining your valuable federal student loan benefits. With that said, loan consolidation will not save you any money since it will not change your interest rate.
- Lower your payments. Applying for an income-driven repayment plan is another alternative to refinancing your federal student loans. If you qualify, your new monthly payment amount is based on a portion of your discretionary income; depending on your situation, your monthly payment might be $0.
The bottom line
If you have bad credit, you may be motivated to refinance your student loans to lower monthly payments. However, many lenders require a minimum credit score in the mid-to-high 600s. You will likely need a cosigner on the loan application to qualify. Shopping around and comparing rates may help you to identify lenders with varying loan approval requirements.
If you cannot find a willing cosigner or a lender that will work with your existing credit, it may be best to improve your credit score and revisit a refinance down the line. Even if you qualify to refinance now, remember that doing so may not be the best move financially, as you may end up paying higher interest rates on a new loan.
