How to refinance student loans with bad credit

If you refinance student loans, you can change the rate and term of your loans, lower your monthly payment, and hopefully save money on interest. The catch? Your credit score plays a big role in whether you qualify. 

Experian reports that about 28% of Americans have credit scores in the fair or poor range (a FICO score below 670), which can make it hard to get approved. If you fall into this group, there are steps you can take to boost your chances of approval. Shopping around with multiple lenders and applying with a cosigner, for example, are two approaches that can help. 

What credit score do I need to refinance student loans?

Many lenders require a FICO score of 670 or higher to refinance student loans. However, minimum credit score requirements depend on the lender, and some lenders don’t advertise their minimums. A quick way to check if you might qualify is to prequalify first. Prequalification doesn’t hurt your credit score, but it can give you an idea of rates and your eligibility. Keep in mind that prequalification doesn’t guarantee an offer when you apply.

Lenders use your credit score when evaluating your approval for a refinancing loan, and this score also impacts the interest rate you get approved for. To access the lowest rates, you’ll generally need a credit score in the high 700s. But there are ways you can still qualify, even if your score is much lower than that. 

Check Out: Do student loans affect my credit score?

How to refinance student loans with bad credit

If you’re struggling to qualify on your own, try the following.

1. Apply with a cosigner 

You may have limited options to refinance student loans with bad credit, but one way to change that is by refinancing with a cosigner. A cosigner is someone who shares legal responsibility for the loan. That means a cosigner is liable for payments if you skip out on them. The extra reassurance lowers the risk for lenders, making it easier to get approved. 

To qualify, cosigners typically must meet the loan’s eligibility requirements. If your cosigner has a strong credit score, you might even qualify for a favorable rate. Just keep in mind that if you fail to make payments on time or miss them altogether, both your credit score and your cosigner’s will be negatively affected. Many private lenders accept applications with cosigners, including the following:

2. Improve your credit score 

If you’re not able to apply with a cosigner, a higher credit score may increase your approval odds and help you qualify for a lower interest rate. Remember, credit scores typically update monthly, so changes won’t be immediate. Here are some steps you can start taking today to help improve your score: 

• Pay your bills on time: Your payment history has a major impact, making up 35% of your FICO credit score. Making on-time payments helps build a positive repayment history. Sign up for automatic payments or text alerts to stay on top of your bills. 
• Lower your credit utilization: If you use a lot of your available credit, it can be a red flag to lenders. To help improve your credit score, aim for a credit utilization ratio of less than 30%. For example, if your credit limit is $7,000, aim to keep your balance below $2,100. 
• Keep credit accounts open: You might think of canceling an old credit card, but if you’ve had it for a while, think again. The length of your credit history is 15% of your FICO score, so you want that time under your belt. 
• Hold off on new credit applications: Applying for multiple loans and credit cards within a short time span can elevate your risk profile and hurt your credit score. New credit is 10% of your FICO credit score. 
• Review your credit report: What’s in your credit report affects your credit score. Go to AnnualCreditReport.com to access credit reports from the three major credit bureaus, Experian, Equifax, and TransUnion. Verify the information is correct. If there is inaccurate information, dispute the errors immediately. 

3. Compare lenders with lower credit score requirements 

Some lenders have lower credit requirements than others, but you’ll still generally need at least a good credit score to qualify. For example, INvestEd has a minimum credit score requirement of 670. Education Loan Finance (ELFI) requires borrowers to have a score of at least 680. Some other refinancing lenders don’t disclose credit score requirements. When you compare lenders, look at factors like eligibility criteria, average interest rates, repayment terms, and cosigner release options. 

Should I refinance if I have bad credit?

Even if you have bad credit, there are multiple reasons to refinance student loans:

• Switch from a variable to a fixed rate. 
• You can qualify for a lower rate.
• Change lenders or loan servicers. 
• Change your repayment term for a lower monthly payment or a quicker payoff. 
• Consolidate multiple student loans for a single monthly payment. 

Alternatives to consider

If you don’t meet a refinancing lender’s credit requirements and you don’t have a cosigner to bring on, consider these alternatives to make your payments more manageable. 

Sign up for the SAVE plan 

If your monthly payments aren’t affordable, you may be able to reduce them by enrolling in the new income-driven repayment plan, Saving on a Valuable Education (SAVE). The SAVE plan covers unpaid interest — which means the government will take care of monthly interest not included in your monthly payment. And monthly payments are determined based on the difference between your income and 225% of the poverty line. Plus, they’re set at a percentage of that difference, such as 5% for eligible undergraduate loans (starting in summer 2024). 

This can potentially improve your credit score by ensuring your loans don’t fall into delinquency or default due to unaffordable repayment amounts. Additionally, your remaining debt is forgiven after your repayment period ends. 

See if you qualify for forgiveness 

For borrowers with federal student loans, forgiveness programs can be a viable alternative to refinancing, especially for those with poor credit. If you work in public service, you may be eligible for the Public Service Loan Forgiveness (PSLF) program, which forgives the remaining balance on your loans after 10 years of qualifying payments. Loan repayment programs also exist for professionals in certain fields, such as education and health care. 

Consolidate federal loans

A Direct Consolidation Loan can merge your federal loans and simplify your repayment. Consolidating doesn’t lower your interest rate like refinancing can, but it can make things easier. In some cases, you may be eligible for a new repayment option. For example, Parent PLUS loan borrowers can access the Income-Contingent Repayment (ICR) plan after taking out a Direct Consolidation Loan. ICR sets payments at 20% of your discretionary income or what you’d pay over a 12-year repayment period, adjusted to your income. 

Sign-up for autopay 

Many loan servicers offer borrowers an interest rate discount of 0.25 percentage points when you sign up for automatic payments. While it won’t lower your interest rate as much as student loan refinancing can, it can help. Just make sure you have the funds in your account to avoid overdrafts. 

Talk to your lender 

If you want to refinance student loans but have a low credit score, discuss options with your lender. You may qualify for deferment or forbearance if you’re facing financial hardship. These options can temporarily pause or reduce your loan payments, providing some financial relief when you need it most. Your lender can explain the qualifications for these programs and help you determine the best course of action based on your specific circumstances.