Student Loan Refinancing with Bad CreditApril 29, 2023
Refinancing student loans involves replacing existing loans with new ones. Ideally, the new loan will decrease your monthly payments by providing a lower interest rate or extending your repayment term. This could make your student loan payments easier to manage.
But many lenders require good-to-excellent credit to qualify for student loan refinancing. That said, some may also be willing to work with borrowers with less-than-perfect credit. Remember that if your credit isn’t great, you’ll likely end up with a high-interest rate, as the lowest rates are available to borrowers with the best credit. person
Here’s what to know about student loan refinancing with bad credit.
What Credit Score is Required to Refinance Student Loans?
The minimum credit score required to refinance student loans varies by lender, though many lenders require good credit—a FICO Score of 670 or above. As you compare student loan refinancing options, talk with different lenders about their credit score requirements for borrowers.
Should You Refinance Student Loans with Bad Credit?
If you’re struggling to manage your monthly student loan payments, but your credit isn’t great, refinancing might or might not be a good choice. That’s because you could end up with a high-interest rate, as lenders often view borrowers with poor credit as having a higher lending risk.
It makes sense to compare rates if you’d like to refinance student loans with bad credit. If you can get a lower rate or a longer term that lowers your monthly payments, it could offer some financial relief. You might also consider applying with a cosigner who has stronger credit, as this could result in a better rate or term.
Ways to Refinance Your Student Loans with Bad Credit
While refinancing your student loans can be more difficult if you have poor credit, it’s not impossible. Here’s how to potentially qualify for a student loan refinance with bad credit.
Use a Cosigner
You could opt to refinance student loans with a cosigner if your credit is a roadblock. A cosigner is a trusted friend or relative that serves as support on your loan application. Your lender will consider their credit in addition to yours, so if your cosigner has strong credit, it could improve your chances of qualifying for a decent loan. Be aware that if you default on your loan, your cosigner will be responsible for repayment, so ensure you can comfortably afford your new monthly payments.
In general, it’s smart to use a cosigner with strong credit, consistent income, and someone that’s financially responsible.
Shop Around with Lenders
As mentioned, different lenders have different requirements for borrowers. Some may have lower credit score requirements than others, so it’s essential to compare student loan refinance lenders to find the best option.
Many lenders allow you to prequalify for loans with a soft credit pull, which won’t damage your credit score. Prequalifying can offer insight into what rate you might qualify for.
Increase Your Cash Flow
When you apply for a new refinancing loan, your lender will look at your debt-to-income (DTI) ratio. This ratio is a percentage that measures your overall debt level divided by your total monthly income. A DTI below 43% is considered acceptable by many lenders.
If your DTI ratio exceeds that percentage, increasing your monthly income is one way to bring it down. Here are a few ways to help boost your cash flow:
- Pick up a side hustle
- Find a part-time job
- Increase your hours at work
- Ask for a raise
Improve Your Credit Score
The benefits of a good credit score are many. Better credit increases your chances of qualifying for a loan with a low rate, and a wider range of lenders may be available to you if you have a good credit score.
While improving your credit takes time, the benefits are long-lasting. Here are some strategies to help improve your credit score.
- Focus on paying down your debt
- Ensure you pay on time each month
- Avoid closing old accounts
- Apply for new accounts sparingly
Alternatives to Student Loan Refinancing
If you’re unable to qualify for student loan refinancing due to bad credit, here are some alternatives that could provide financial relief.
- Student loan forgiveness: Certain professions offer student loan forgiveness after a set time period, including teaching and many public service positions. Look into options for student loan forgiveness.
- Consolidation: Borrowers with federal student loans may be able to consolidate them through the Federal Loan Consolidation program. Student loan consolidation will provide you with a fixed-rate loan instead of multiple payments. Your interest rate will be the average rate of the loans you consolidate.
- Deferment or forbearance: You may be eligible for deferment or forbearance if you can prove you’re suffering a financial hardship. Learn more about deferment vs. forbearance, and contact your loan servicer to discuss your options.
- Payment plan: Your lender may also be willing to work out a temporary payment plan with you, potentially reducing your monthly payments for a short time period.
Refinance Your Student Loans with ELFI
There are several benefits of refinancing student loans with ELFI, including flexible repayment terms and low rates. While 680 is its minimum credit score requirement, you can also opt to apply with a cosigner with great credit. Doing so will increase your chances of approval. Alternatively, you could work to improve your credit and lower your DTI, which may help you qualify on your own in the future.
Learn more about ELFI’s requirements for student loan refinancing.