If you can secure better terms for your student loan through refinancing, you can save money over the life of your loan. But does refinancing student loans hurt your credit score?
While refinancing may cause a small temporary dip in your credit score, your credit score will likely improve in the long term if it helps make your repayments more manageable.
Here’s what to know about how refinancing student loans may affect your credit and how to decide if student loan refinancing is the right choice for you.
Do Student Loan Refinance Lenders Look at Credit Scores?
Lenders look into factors including your credit score and payment history to determine if you qualify for student loan refinancing. As a reminder of what creditworthiness is: Your credit tells a story about your past borrowing habits and gives lenders insight into your likelihood of repaying the loan. If that story reflects positively on you, you’re considered “creditworthy” and more likely to qualify for better loan terms, such as a lower interest rate.
To provide you with pre-qualified refinancing rates, lenders usually run a soft credit check with the credit bureaus. A soft credit inquiry doesn’t typically impact your credit score. If you decide to move forward with a student loan refinance offer by submitting a formal application, a lender will conduct a hard credit inquiry, which will impact your score. This impact, however, is usually temporary and may be worth it if you’re able to secure better loan terms.
Possible Positive Effects
There are short- and long-term positive effects of refinancing student loans when it comes to your credit score. Here are some of the times when refinancing student loans can be a good idea.
If your original loan has a high interest rate or high monthly payment and it causes you to have late or missed payments, that can hurt your credit score. According to FICO, a popular credit scoring model used by lenders, 35% of your FICO score calculation is based on your payment history.
Recommended: Refinancing Student Loans Guide
Refinancing student loans can affect your credit in a positive way in the short term by making your monthly payments manageable. You may be able to lower your monthly payments if you qualify for a reduced interest rate. You can also choose to extend your repayment term during a refinance to lower your monthly payment, though this may mean you’ll pay more over the life of the loan.
If you secure better loan terms that make it easier to repay your loans on time, you’ll make positive strides with your credit over time as you maintain a good payment history. Again, with 35% of your FICO score impacted by your repayment habits, this is a key benefit.
And if you qualify for a lower student loan interest rate, a student loan refinance can help you apply more of your cash flow toward your principal balance. In addition to saving more on interest charges for your total education debt, you’ll also repay your student loans faster. Aside from the mental relief you’ll get from a faster debt payoff, paying off your student loan accounts reduces the total outstanding amount you owe, which can impact up to 30% of your FICO score calculation.
Possible Negative Effects
So how does refinancing student loans hurt credit exactly? The negative effects on your credit score are typically minimal if you’re able to make on-time payments. Here’s what to know.
Although your credit isn’t impacted by a soft credit check, a hard inquiry does affect your credit score. However, the impact is usually a five-point reduction or less and a hard inquiry from a student loan refinance only hurts your score for a few months, according to credit bureau Experian. After the inquiry drops off of your credit report, it’s no longer factored into your credit score calculation.
A student loan refinance can negatively impact your credit score long-term if you find that you’re still unable to make full, on-time monthly payments. If for any reason your loan goes into default, it will adversely affect your credit score.
Can You Prevent Any Negative Effects?
The negative impact of refinancing student loans is small, but there are still strategies to minimize their effect:
• Keep applications within a 14- to 45-day window. When multiple credit inquiries of a similar type are conducted within a close time frame of each other, some credit scoring models count them at only one inquiry.
• Keep paying your loans while in the refinancing process. Don’t stop making payments to your original loan servicer or lender until your refinancing lender gives you the all-clear. Prematurely stopping your loan payments can negatively impact your credit, even if you’re in the middle of refinancing.
• Stay on top of your student loan refinance payments. Maintain positive payment activity on your loan to avoid adversely affecting your credit score down the line.
Recommended: Pros and Cons of Student Loan Refinancing
When Can Refinancing Student Loans Be a Bad Idea?
If you don’t have a strong credit history, it might be challenging to get approved for a competitive refinance student loan rate and terms. Consider building your credit before applying or finding a cosigner with strong credit.
Refinancing also is not a good idea if you’re planning to take advantage of federal student loan programs or benefits, such as deferment, forbearance, student loan forgiveness, or income-driven repayment plans. You will no longer have access to these federal programs if you refinance your loan with a private lender.
Alternatives to Student Loan Refinancing
Student loan refinancing isn’t the only student loan repayment approach available. Alternative options provided by federal and state programs offer various ways to get relief from your education debt.
Loan Forgiveness Programs
Federal student loan borrowers have access to various student loan forgiveness programs that cancel a portion of your student loan debt. Popular programs that can reduce your student loan burden without impacting your credit include:
• Public Service Loan Forgiveness (PSLF). Borrowers who participate in PSLF must work full-time at the government level (federal, state, local, or tribal) or nonprofit. During this time, you must also enroll in an income-driven repayment plan and make 120 qualifying payments. Afterward, your remaining eligible federal loan debt is forgiven.
• Income-driven repayment (IDR) plans. If you don’t want to work in public service, but still want to get a portion of your loans forgiven, income-driven repayment is an option. After making 20 or 25 years of payments on an IDR plan, the remainder of your eligible debt is forgiven.
Each program has specific requirements that you’ll need to fulfill before receiving loan forgiveness.
Loan Repayment Assistance Programs
Loan Repayment Assistance Programs (LRAPs) are provided through federal and state-sponsored programs, and sometimes through a private employer as an incentive. Qualified loans vary between programs, but some allow commercial loans (i.e. private student loans) and federal student loans.
Typically, a service commitment to work at an approved facility in an underserved area is required to be eligible for loan repayment assistance. After your service contract ends, you’ll receive a certain amount of repayment assistance toward your student loan debt if you meet all of the program’s criteria.
Direct Consolidation Loan
A Direct Consolidation Loan is only available for eligible federal loans; private student loans can’t be consolidated into a federal loan. If you have a hard time keeping track of multiple federal student loans, their due dates, and payment amounts, a consolidation loan simplifies your repayment.
It combines multiple loans into one new consolidation loan. The loan will be at a new interest rate which is the weighted average of the interest on all loans involved in the consolidation. This means that your interest rate will increase and you’ll pay more over the life of the loan. And while it can lower your monthly payment if you extend your repayment timeline, you typically end up paying more overall due to the additional interest you pay when lengthening your loan term.
There are many pros and cons involved with a Direct Consolidation Loan so tread carefully before taking this step.
SoFi Student Loan Refinancing Rates
Refinancing student loans can help you save money over the life of the loan if you can secure a lower interest rate or more favorable terms. While the hard credit inquiry required by a loan application may temporarily lower your credit score, the long term benefits will be worth it if you’re able to save money and make your monthly payments more manageable.
It’s important to understand, however, that if you refinance federal student loans, you’ll lose access to valuable federal benefits and protections — so you’ll only want to refinance if you’re not planning to take advantage of any of these programs.
If you think a student loan refinance may make sense for your situation, you can check how much you might be able to save using a student loan refinancing calculator tool.
A SoFi student loan refinance can help you reduce your total educational costs and offers competitive terms at low fixed or variable rates.
Photo credit: iStock/ferrantraite
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.