Refinancing your student loans might sound like a good idea if you’re trying to lower your interest rate and monthly payments. However, refinancing requires a hard credit check, and you may not be eligible if you have bad credit.
Luckily, borrowers with less-than-perfect credit still have options to refinance student loans.
What Credit Score Is Needed To Refinance Student Loans?
There isn’t a standard credit score required to refinance your student loans. Each lender sets its own standards, including minimum score requirements.
Some lenders don’t disclose a minimum credit score because they want potential borrowers to consider other approval (or denial) factors other than your score. Your desired loan amount, income and repayment history are also factors.
How To Refinance Student Loans With Bad Credit
Bad credit can prevent you from refinancing student loans. A bad credit student loan refinance can help you eliminate your debt. Consider these steps:
1. Compare Lenders
It’s important to compare as many lenders as possible when exploring student loan refinancing options. Compare lenders based on what they offer, including:
- A low (or no) minimum credit score requirement
- Debt and income restrictions
- Fees and interest rates
- Repayment terms and discounts
- Loan and graduation requirements
There can be other factors based on your needs and circumstances. Comparing lenders lets you determine what you’re eligible for and locate the best deals. Bad credit typically results in higher interest rates, so comparing lenders can help you find the most competitive offers.
2. Raise Your Credit, If Possible
Take the necessary steps to improve your credit score before applying if you have the time. For example, you can:
- Dispute errors. Federal law allows you to get one free credit report every 12 monnths from each of the three credit bureaus—Equifax, Experian and TransUnion. However, you can get a free credit report weekly through December 2023 at AnnualCreditReport.com. Once you get your report, you can see what lenders see when they look at your report. If you find any errors, dispute them with the credit bureau and get them removed to boost your score.
- Pay down debt. Payment history is the most important factor when calculating your credit score, so repay any existing debt and plan to pay your bills on time. Repaying your debt also increases your score because it lowers your credit utilization. You can also lower your credit utilization by increasing your credit limit, as long as you don’t use any of that new limit.
- Stay put with accounts. When you’ve paid off your debt, avoid closing old accounts. Older accounts can boost your credit score because it increases the average age of your accounts and it helps lower your credit utilization ratio. Also, avoid opening new accounts, which can ding your credit score with a hard credit inquiry.
3. Decrease Your Debt
Decreasing your debt frees up your income and significantly boosts your credit score. There are a few ways to attack debt, such as the:
- Debt avalanche method. List all your outstanding debt, including credit cards, medical bills and loans. Write the remaining amount, the minimum payment due, the interest rates and the due dates for each. While making the minimum payments on all your outstanding debt, you’ll put any extra cash toward the debt with the highest interest. You’ll continue this until the debt is fully repaid, then move on to the debt with the next-highest interest rate.
- Debt snowball method. This technique focuses less on interest rates and more on the amount of each debt. Make minimum payments on all your outstanding debt, but allot your extra cash toward your smallest debts. After you pay off the smallest debt, move on to the next-lowest debt.
While paying down debt is one of the fastest ways to boost your credit score, it doesn’t always come as fast enough. Creating a debt repayment plan is helpful. However, you may need to boost your income if you don’t have enough money to make ends meet and pay off your debt. Increasing your pay can come from a couple of different places, like:
- Requesting a raise. This can happen quickly and allows you to pay down debt while showing potential lenders that you have adequate income. If you can’t secure a raise, ask your job about upcoming promotion opportunities that come with a raise or bonuses.
- Get a side hustle. Whether that’s delivering groceries, walking dogs or selling homemade products online, you can create a separate business from your primary job. Use that income to pay down outstanding debt, boosting your credit score to qualify for student loan refinancing.
4. Apply with Co-signer
A co-signer could be the deciding factor when qualifying for refinancing. Ensure that your co-signer, usually a parent or relative, has a solid credit history and at least a good credit score. The higher the credit score, the more likely you are to qualify for refinancing at the lowest interest rate.
Remember, a co-signer shares responsibility for the loan. If you miss a payment or fall behind, your co-signer is obligated to make the payments. If you miss payments, your credit score will drop—and so will your co-signer’s.
Alternatives To Refinancing Student Loans
Refinancing isn’t the only way to reduce your student loan payments. Some other options include:
- Consolidation. You can apply for a direct consolidation loan if you have federal student loans—which combines all your federal loans into one and rounds your interest rate up to the nearest one-eighth percent. There’s no hard credit inquiry for consolidation, and you don’t need a co-signer to be eligible.
- Changing repayment plans. If you’re struggling to make payments, consider enrolling in an income-driven repayment (IDR) plan. Your monthly payments are based on your income and household size, which means your payments could be as low as $0 if you’re currently unemployed. However, IDR plans are only available for federal student loans.
- Use discounted options. Some lenders offer an autopay discount. If you sign up for autopay, you might be eligible for an interest rate reduction on your monthly payments. Lowering your interest rate means more of your monthly payment applies to paying down your principal balance. Some lenders might offer other perks and incentives, like referral sign up bonuses.
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