How To Refinance Student Loans If You Have Bad Credit

If you have bad credit, refinancing your student loans through a private lender may be challenging. Some lenders will charge you higher interest rates and impose inflexible terms, while others might deny your new loan application outright.

However, every lender uses different criteria to determine borrower eligibility and rates. So, even with credit challenges, some student loan refinancing options may still be available to you.

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. There are exceptions, however, such as online lender ELFI, which plainly and publicly states its minimum credit score requirement of 680.

A credit score over 670 — what is considered a good FICO score — 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 bad-credit interest rates can be in the double digits.

Either way, try to get prequalified with top-rated student loan refinance companies. This will give you a sense of where your credit score puts you in terms of eligibility and interest rates.

When is refinancing worth it if you have bad credit?

You could save money by refinancing, even if your credit score is low. Here’s what to consider to determine if refinancing makes sense for you.

Better interest rate

Even if your credit score is low, a slight improvement in your credit 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 prequalifying with other lenders. Many let you check your approval odds and potential refinance rates online with a soft inquiry that doesn’t impact your credit score.

Different repayment timeline

Another potential upside of refinancing is extending your 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 has 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.

Lender incentives

Whether you have a federal or private student loan, refinancing to change lenders may allow you to take advantage of special incentives or bonus offers (or similarly, forfeit perks you enjoy from your current lenders). However, refinancing federal student loans with a private lender means permanently losing valuable benefits, like access to income-driven repayment plans and government-exclusive forgiveness programs. 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 your loans into one refinanced loan, you’ll have a single monthly payment instead of juggling several payment amounts and due dates each month. Plus, you can 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 cosigner

Choosing to add a cosigner — such as a parent, sibling or spouse — on your loan application might help you qualify to refinance your student loans when you have credit issues. Of course, your cosigner needs good credit (or better) for this approach to work. If your cosigner’s credit is good enough, they might help you secure a lower rate and better loan terms.

On the negative side, cosigning could backfire for your loved one, as it risks their credit reports and scores. If you can’t repay your refinanced student loan as promised, your cosigner’s credit will suffer from late payments or loan default.

A cosigner is liable for the debt — just as much as if they were the sole borrower. Even if you always pay on time, the cosigned student loan on your loved one’s credit reports might make it difficult for them to borrow again in the future.

Married? Consider joint refinancing

Splash Financial and PenFed Credit Union are among select lenders that might allow you and your spouse to consolidate and refinance your education debt into a single loan. Then you could repay this single loan together, side by side. This arrangement could help you qualify for refinancing with bad credit — assuming that your spouse has stronger credit than you do.

Just be cognizant of potential pitfalls: If you and your loved one refinance federal loans, you’ll both lose those government-exclusive protections. Plus, if you end up separating or divorcing in the future, it can be more difficult to disentangle a jointly refinanced student loan.

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.

Improving 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. After all, your payment history is worth 35 percent of your FICO Score.
• Reduce your credit card balances. Your credit utilization ratio (or your balance-to-limit ratio) has a big impact on your credit scores. While zeroing your balances monthly is the best way forward, asking your credit card issuer to increase your credit limit is another strategy for improving your utilization ratio.
• 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 confirm your eligibility and check your potential 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. Each additional hard inquiry can drop your score by up to five points, according to FICO, so it’s ideal to only formally apply for refinancing after you’ve narrowed down to your preferred lender.

Also, seek out lenders that might specialize in serving distressed borrowers. YREFY, for example, was founded in 2017 to refinance loans for private loan borrowers who are seriously delinquent or in default, and therefore have lower credit scores.

Jack Wallace, a director at YREFY, tells Bankrate that his company offers single-digit interest rates and terms spanning two to 20 years to borrowers across the credit spectrum who are motivated to repay their balance. Their customers’ average interest rate is about 4 percent, Wallace adds.

A substantial amount of the volume that we’ve done is with people that took out private loans, that had good or very good credit. But then the Fed raised interest rates 500 basis points, inflation came along and the [borrowers’] income didn’t go up. So… they may have been at a floating-rate loan at 9 or 10 percent, all of a sudden they’re at 16 and a half percent or 18 percent. And it was killing them.

— Jack Wallace
Director and advisor, YREFY

Improve your cash flow

Lenders also consider your debt-to-income ratio (DTI ratio), among other refinancing eligibility requirements. DTI compares the income you earn each month (pre-tax) 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 Consolidation Loan 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, student loan consolidation will not save you any money since your new interest rate will be a rounded-up average of your current rates.
• 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.
• Postpone your monthly dues. If you’re experiencing a financial hardship, such as a job loss or a stack of medical bills, consider a deferment or forbearance. These measures, offered on all federal loans and by some private lenders, give you a temporary break from repayment, although interest usually continues to accrue.
• Seek out repayment aid. More and more employers are offering student loan repayment matching or tuition reimbursement in the workplace. Besides companies that pay off education debt for you, some federal, state and private agencies may offer repayment aid in exchange for service, particularly if you work in a high-demand field, like healthcare.
• Get professional help. If you have no way of catching up with repayment and are concerned about the continued impact on your credit, consider reaching out to organizations that offer student loan help. Certified credit counselors, student loan lawyers and other professionals can help you explore measures like student loan debt settlement or even bankruptcy — though neither option is quick.

What’s your next step?

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 refinancing down the line. Even if you qualify to refinance now, remember that it’s not always the best financial move. Unless you’re ready to learn about the steps of student loan refinancing, you might first consider credit-improvement advice.