How to refinance student loans with bad credit

If you can line up a cosigner, you may still be able to refinance your student loans with bad credit.

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Refinancing student loans with bad credit may require you to find a cosigner with good credit. (iStock)

Refinancing your student loans generally requires you to have good to excellent credit. If your credit report is in rough shape, this can be discouraging. But even with poor credit, you have options when it comes to lowering the interest rate on your student loans. 

This article will go over how you can refinance student loans with bad credit, as well as reasons you may want to refinance student debt — and some situations when you shouldn’t.

How to get student loan refinancing with bad credit

When you graduate, you may be left with a number of student loans — each with their own balance, interest rate, and monthly payment. Refinancing these loans may allow you to consolidate them into a single loan with a lower interest rate and monthly payment. 

Before applying for a refinance loan, make an inventory of the loans you currently have, their interest rates, balances, and payment status. This will help you determine the size of the refinance loan you’ll need and help you decide whether the refinancing offers you receive will actually save you money.

You can use Credible’s student loan refinance calculator to get an idea of how much refinancing could save you.

Refinancing with a cosigner

Borrowers with good credit — a credit score of 670 or higher — can often find student loan refinance options. If your score falls below that mark, you may still be able to refinance, though you may need to take some additional steps. The most common one is to find a cosigner with excellent credit

A cosigner is someone who agrees to be equally responsible for the loan and applies for the loan with you. If you fail to make payments on the loan, your cosigner will be responsible for making them. 

A cosigner is often a parent or family member, but some lenders will allow non-relatives to cosign a loan with you. If finding a cosigner isn’t possible, you may be able to find a lender who’s willing to consider other aspects of your financial history, like your employment history. But you may have a more difficult time.

Comparison shopping for a refinance lender

As you shop for a student loan refinance with bad credit, it’s especially important to compare offers among lenders. 

Lenders typically offer interest rates based on your credit score, with better scores yielding better rates. With poor credit, the offers you receive will be on the higher end of the spectrum. 

Even a small difference in interest rate can mean a large change in your monthly payment and total interest paid over the life of the loan, so be sure to get quotes from several different lenders to find the lowest rate you can qualify for.

5 reasons to refinance student loans

If you have a pile of student loan debt, refinancing can be a good option. You may consider refinancing your student loans if:

  1. You’re paying very high interest rates. You may have private student loans with high interest rates. If you can qualify for a refinance loan at a lower rate, refinancing can save you money each month — and potentially thousands of dollars in interest payments in the long run.
  2. You’re having trouble keeping track of your student loan payments. A handful of loans with varying due dates can be hard to keep track of. Refinancing your student loans may allow you to consolidate into a single loan with a single payment, making it easier to make your payment on time, every time.
  3. You’re paying a variable interest rate. With variable-rate loans, your interest rate and monthly payment can increase over time. You may be able to find a student loan refinance with a fixed interest rate, meaning your payment will stay locked in for the life of the loan. This can make it easier to budget and be secure that you’ll be able to keep making your payments.
  4. You want to extend your repayment term. Your student loans may have a short repayment term. With a refinance loan, you may be able to get a longer repayment period, lowering your monthly payment to fit within your budget. But be aware that extending your repayment term will increase the amount of interest you pay over the life of the loan.
  5. Your credit score has improved. Since lenders base your interest rate on your credit score, you may qualify for a better rate if your finances have improved since you took out the original loans.

Credible makes it easy to compare student loan refinance rates from multiple lenders.

4 times when you shouldn’t refinance your student loans

Refinancing may not always be a good option. You may choose to hold off on a refinance if:

  1. You have federal student loans. Federal loans may have more generous repayment plans, including income-based repayment with a monthly payment based on how much money you earn. Federal student loans also may come with other benefits and protections, including forbearance and access to Public Service Loan Forgiveness.
  2. Interest rates have risen. Interest rates rise and fall over time along with the overall market. If rates have risen since you took out your loans, refinancing may not be a good option.
  3. Your credit score has dropped. A poor credit score usually leads to higher interest rates, making a refinance a bad deal for you.
  4. You don’t have a cosigner. With bad credit, your lender may require a cosigner to qualify you for the loan. If this isn’t an option, you may need to hold off on refinancing.

Why does credit matter when refinancing student loans?

Your credit score has a major impact on your ability to take out a loan. Many lenders have a minimum credit score to qualify for their loans. Even if you do qualify, lower credit scores typically lead to higher interest rates — and larger monthly payments. 

A cosigner can help, since they’ll be equally responsible for the loan and lenders will take their finances into account when making a decision on your loan.

 Credit scores come from the three major credit-rating agencies: Equifax, Experian, and TransUnion. They calculate your score based on factors including:

  • Your payment history — Making your payments on time, every time, is the best way to boost your credit score. Late payments or major issues like a foreclosure or bankruptcy can severely damage your score.
  • Your debt — Higher levels of debt can ding your score.
  • Your current accounts — The longer you’ve had accounts open, the better it is for your score. The number and type of credit accounts you have also factors into your score.
  • Your credit applications — Applying for new loans can temporarily drop your score, so do this judiciously.

What are eligibility requirements to refinance student loans?

Every lender has its own eligibility criteria for a refinance loan. But you’ll typically need a credit score of at least 670, or have a cosigner, to qualify. Some lenders may require that you’ve graduated with a degree to qualify for a refinance loan. You may also need to be employed or have a job offer for work that begins soon. 

What to know about refinancing federal student loans

If you have federal student loans, you can choose whether to consolidate the loans or refinance them. 

Consolidating federal student loans involves taking out a new loan through the federal government, called a Direct Consolidation Loan. The new loan pays off and replaces multiple federal loans you may have with different servicers. 

Your interest rate on the consolidation loan will be the weighted average of your current loans, so consolidating typically doesn’t lower your interest rate.  However, you can still choose one of the federal repayment plans with a consolidation loan, including income-based repayment. But, consolidating your loans may restart the clock on any loan forgiveness you qualify for.

Refinancing federal student loans typically refers to using a new, private student loan to pay off your current federal student loans. You may be able to qualify for a lower interest rate with your refinance loans, saving you money on your monthly payment. But your new private student loans won’t have all the same benefits and protections as federal loans, and you won’t be able to qualify for federal student loan forgiveness. 

What to know about refinancing private student loans

If you have private student loans, the decision on whether to refinance is typically easier. If you qualify for a better interest rate than what you’re currently paying, refinancing your loans is often a good idea. If you don’t qualify for a refinance, or only qualify for a high rate, you may want to avoid refinancing.

To refinance, first search for lenders that may be a good fit. You can use a site like Credible to compare multiple offers quickly. As you go through the application, the lender will ask for information about your current loans. 

If you qualify, your new refinance lender may pay off your current loans directly or give you instructions on how to do so yourself. Be sure to keep making regular payments on your student loans until your lender confirms they’ve been paid off. 

Using a site like Credible to comparison shop for student loan refinance lenders can help you find the best possible refinance deal.

Alternatives to student loan refinance with bad credit

If refinancing your student loans isn’t in the cards, whether because of your bad credit or other factors, you still have options to save money or pay off your loans faster. 

With federal loans, you may be able to switch to a different repayment plan that extends your loan term or offers you the ability to make payments based on your income. Private lenders may also be willing to work with you if you’re having trouble making your monthly payments.

You may also use budgeting strategies to help you. Instead of making a single monthly payment on your student loans, you may choose to make half payments every two weeks. Over the course of the year, this adds up to making an extra payment — helping you pay down your loan more quickly. 

If you find yourself with extra money in a particular month, you may also choose to make an extra payment on your student loan. These payments can be applied directly to the principal of the loan, helping you save on interest. 

Be sure to check with your loan servicer before starting either of these tactics. Most student loans don’t have prepayment penalties, but you want to make sure to avoid these fees and be sure your servicer handles the payment in the correct way.