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Student debt payments can put a substantial strain on your monthly budget, but refinancing your student loans may ease that tension a little. However, as refinancing is offered by private lenders, your credit score will be a deciding factor in whether you’ll be approved and if the terms will be better than those of your current loans. Fortunately, borrowers with little to no credit history (as well as those with poor credit) may still be able to qualify for a refinance, but they might require a co-signer.
Key Takeaways
- Your credit score can heavily influence your eligibility for a student loan refinance, in addition to what terms you’ll be offered.
- A lower interest rate typically means a smaller monthly payment and a lower overall loan cost, but depending on the amount being refinanced, this might not be the case.
- Borrowers can improve their credit scores by maintaining a positive payment history and getting a co-signer, among other strategies.
The Impact of Credit Scores on Student Loan Refinancing
Your credit score is a numeric rating of your likelihood to repay a debt. Keeping your credit utilization ratio relatively low and making on-time payments can boost your score, while borrowing large amounts and defaulting on your debt can severely damage it. Typically, the higher your credit score, the better chance you have of securing a loan, and the more favorable your loan offers will be.
When refinancing a student loan, you’re essentially paying off an existing education loan (or loans) with a new private loan that ideally has better terms, such as a lower interest rate. As such, a high credit score can translate to both a lower monthly payment as well as paying less interest over the life of the loan. However, this can vary based on the amount being refinanced and the repayment term.
Important
You can refinance federal student loans with a private lender, but doing so means losing access to certain benefits and protections that aren’t available to private student loans. These include federal forbearance and deferment options, loan forgiveness programs, and fixed interest rates (private rates can be variable, depending on the lender). You cannot refinance a private student loan into a federal one.
When you refinance multiple loans into one, the new principal will equal the total unpaid balances of the old loans. Even with a lower interest rate, the amount of interest that accrues each month can equal or exceed what you paid prior to refinancing if the outstanding balance is large enough. Your monthly payment may also increase if the refinanced loan has to be repaid within a shorter time frame (though the overall cost may decrease due to interest having less time to accrue).
Note
Fees and other closing costs can further negate any potential savings from refinancing.
Additionally, because lenders typically have minimum credit score requirements, current students and recent graduates can have a harder time qualifying for a refinance (as they often have little to no credit history).
Improving Your Credit Score for Refinancing
To increase your likelihood of qualifying for a refinance with the best possible terms, you’ll want to immediately start building your credit. To that end, be sure you’re making regular, on-time payments on any of your outstanding debts. Not only will this help establish a positive payment history (the biggest factor of a FICO score, the most commonly used type of credit score), it will also decrease your debt-to-income (DTI) ratio, which is another metric that lenders consider when reviewing applications.
Additionally, don’t rush to close out your oldest credit accounts. Instead, consider waiting to apply for any new credit until after you’ve gotten your student loans refinanced. Keeping your oldest accounts open improves the average length of your credit history (another FICO factor), while taking out new accounts reduces that average, and the hard inquiries that lenders make when you apply for credit can directly lower your store.
Finally, get into the habit of regularly reviewing your credit reports from each of the three major bureaus. Doing this will allow you to spot inaccurate information that may be hurting your score, which you can dispute in order to have it removed.
Note
In some cases, you may be required to complete your degree before you can refinance.
Alternatively, you can better your odds of qualifying for a refinance by applying with a co-signer. A co-signer is someone who agrees to be responsible for repaying your loan should you fail to do so. You’ll want your co-signer to have at least a good credit score; if theirs is roughly equivalent to or worse than yours, then their inclusion likely won’t improve your eligibility.
Tip
If you’re interested in refinancing but don’t want to give up the benefits of your federal student loans, consider a direct consolidation loan. This allows you to combine your outstanding federal student loans at a fixed interest rate equal to the weighted average of your old loans’ rates.
The Bottom Line
Refinancing is a useful option for managing your student loans, but your credit score will ultimately determine how helpful it will actually be. Raising your credit score ahead of applying for a refinance should improve your eligibility and result in more favorable loan offers. Thoroughly weighing the new loan’s terms and benefits against those of the loan(s) you’d be refinancing will help you make the best decision for your situation.
