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Guide to Refinancing Student Loans With Bad Credit

By Melissa Brock · December 08, 2022 · 10 minute read

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Guide to Refinancing Student Loans With Bad Credit

It’s possible to refinance your student loans with bad credit, but you may face challenges getting approved with a low credit score. Your credit score is a three-digit number that shows how well you currently and have paid back debt in the past.

“Having bad credit” simply means that your credit reports, which are records of how well you’ve paid off debt, reveal negative credit actions that you’ve had in the past.

When you refinance your student loans, a private lender will take a look at your credit score to evaluate how well you’ve paid off debt in the past. A higher credit score may improve your chances of approval and could help you secure a more competitive interest rate. But, your credit score isn’t the only factor lenders review. Lenders typically also take a look at factors including your income, current employment situation, and financial history.

Read on for strategies to refinance student loans with bad credit.

What Is Student Loan Refinancing?

Refinancing student loans means that you take some or all of your student loans and replace them with one new loan to achieve a repayment advantage. For example, you may refinance in order to get a lower interest rate and as a result, pay less over the life of your loan. You may also refinance to extend your loan term, which will lower your monthly payments (but doing so will also result in more loan payments over time).

You can refinance both private and federal student loans. As you are deciding when to refinance student loans it’s important to understand that if you refinance federal student loans, you lose certain benefits with your loan, such as deferment and public service-based loan forgiveness.

What Is Considered Bad Credit?

What is a bad credit score? The definition of “bad credit” varies slightly depending on the credit scoring model used. A credit scoring model is a statistical analysis used by credit bureaus to evaluate your creditworthiness.

According to FICO®, one of the most popular scoring models, a bad credit score is one below 670. Another popular scoring model, VantageScore, considers a bad credit score as one below 661. To put it in perspective, a credit score ranges from 300 to 850.

Some lenders may have a minimum credit score to refinance student loans. Requirements may vary by lender so check in with the lenders you are considering to understand their minimum requirements. And, keep in mind that lenders will evaluate factors beyond just your credit score when making lending decisions.

Strategies for Refinancing a Student Loan With Bad Credit

If you plan on refinancing student loans with bad credit, you may want to consider backtracking and checking your credit reports or purchase your credit scores directly from one of the credit bureaus. There may be a mistake on your credit reports which can hurt your credit score. For example, you may have already paid off a particular loan but your credit report may show that you haven’t yet paid off that particular loan.

You can obtain a free copy of your credit report at annualcreditreport.com from each of the three major credit bureaus — Equifax, Experian, and TransUnion — which track your credit.

There are other strategies you can consider as well, including refinancing with a cosigner, improving your credit score or debt-to-income (DTI) ratio, look into credit unions, consider non-profit debt consolidation, check into secured loans or look for lenders with lower credit requirements. Let’s take a look at each alternative option for student loan refinance for bad credit.

Refinancing With a Cosigner

If you have a relatively low credit score, applying with a cosigner may increase your chances of getting approved for a student loan refinance.

Refinancing student debt with a cosigner means that you ask someone else to agree to help you repay a loan along with you. Cosigners are equally obligated to repay a student loan and are liable if you fail to repay your loan. Any missed payments will affect both you and your cosigner’s credit history.

Improving Your Credit Score

Improving your credit score is another way to fix any credit issues. You can improve your credit score by making payments on time to your creditors, catching up on accounts for which you still owe money, and limiting credit applications. Let’s take a look at all of these student loan refinance need to know opportunities to improve your credit score:

•   Make on-time payments: Making all payments on time is one of the best ways to improve your credit score. You may want to consider setting up auto pay to avoid missing or making late payments.

•   Pay off delinquent or defaulted accounts: If you have accounts for which you still owe money, pay them off. Pulling all accounts up to “paid” status can help your credit score. If you think you need help organizing and prioritizing, you may want to reach out to a credit counselor for assistance. It’s also a good idea to get current on revolving credit balances (such as credit cards and other lines of credit) because paying late or skipping payments can hurt your credit as well.

•   Limit credit applications: Continually applying for credit can hurt your credit score because every time a lender does a hard credit check, it takes a hit on your credit. All of these credit checks can build and detract from your ability to improve your credit score.

Building credit by doing things like making on-time payments is one of the best ways to improve your credit score. Consider using a credit card diligently and paying off the balance each month, get a secured credit card, or become an authorized user on another individual’s credit card.

Improving Your Debt-to-Income Ratio

What is the debt-to-income (DTI) ratio? DTI refers to your monthly debt payments divided by your gross monthly income — the amount of money you have coming into your household.

The best way to reduce your DTI is to reduce your debt payments each month or add more income to your household each month. There are several ways to make this happen, such as paying off your debt (including credit cards, personal loans, auto loans, and/or other types of debt), adding a second or side job to your already-existing income or negotiating a raise at work, working overtime, or applying for a higher-paying job.

Recommended: Why Your Debt to Income Ratio Matters

Check Credit Union Requirements

In addition to banks, online lenders, and other types of lenders, credit unions also offer student loan refinancing opportunities. A credit union is a non-profit financial services cooperative that exists to serve its members. You must be a member of a credit union in order to borrow money from it.

If you already belong to a credit union, consider finding out the credit qualifications necessary for refinancing student loans with that credit union. Shop around among credit unions or other alternative banking solutions to learn more about interest rates, overall payoff amounts, repayment flexibility, and how well each institution treats its customers.

Non-Profit Debt Consolidation

Nonprofit debt consolidation can help you put all of your debts into one manageable payment. It offers a two-pronged advantage: You lower your monthly payment and eventually eliminate unsecured debt, which is debt that isn’t backed by collateral.

Credit card debt is a good example of a debt not backed by collateral. A mortgage, on the other hand, is backed by collateral — the collateral is the home that you borrowed money to purchase. A student loan is a type of unsecured debt because it is not backed by collateral.

Why tap into a nonprofit credit counseling agency for help? They must act in your best interest, though you will have to pay fees for the service. Trained debt counselors can help you come up with a debt payment plan, debt settlement plan, debt consolidation loan, or, if absolutely necessary, declare bankruptcy.

It’s important to note that only unsecured debt is eligible for consolidation.

Secured Loans

Secured loans are backed by collateral, such as a car (in the case of an auto loan) or a house (in the case of a mortgage). If you stop making your payments, the lender can take the collateral backing your loan (the auto or home) to satisfy the debt.

Generally, personal loans are unsecured and can be used for almost any expense. However, some personal loans may be secured by some form of collateral. When evaluating a secured vs. unsecured personal loan, look at things like the interest rate and the type of collateral required to back the loan. Keep in mind that collateral can be seized by the lender if there are issues with repayment.

However, you can use a secured loan to pay for a student loan refinance if you find better terms through a secured loan. For example, you could choose to get a second mortgage to pay for educational expenses.

Unsecured debt is usually considered riskier by lenders (because it isn’t backed by collateral) and may come with a higher interest rate, which is why secured debt may seem more appealing.

Looking for Lenders With Lower Credit Requirements

Think you’re ready to pursue a student loan refinance with lower credit requirements? Let’s take a look at the pros and cons of doing so.

Pros of Using a Lender with a Lower Credit Limit

Cons of Using a Lender with a Lower Credit Limit

Can help with debt management by consolidating all loans into one loan May have trouble qualifying for a refinance due to bad credit
May save money by qualifying for a lower interest rate, which often reduces the amount of money you pay toward your loans over time May pay more for your loan due to higher interest rates for those with bad credit
Can transfer Parent PLUS Loans (a federal loan that parents can take out to finance the cost of college) to the student instead of keeping it in the parents’ name Will lose access to federal benefits if you refinance federal student loans

In order to get the best rates and terms, you may want to consider beefing up your credit score before you apply for a refinance. Consider taking a look at a calculator for student loan refinancing to help you learn about the costs.

Alternatives to Refinancing Student Loans

Refinancing your student loans isn’t your only option. Keep in mind that refinancing federal loans eliminates them from federal programs and protection like income-driven repayment plans. You may also want to consider a few alternatives, including consolidation, forgiveness, deferment, or forbearance options (for federal student loans), or talk to your lender about your options.

•   Consolidation: Consolidation allows you to combine all of your federal student loans into one monthly payment with one servicer. Consolidation won’t lower your interest rate — the new rate is the weighted average of your existing interest rates. You cannot consolidate private student loans — you may only refinance them.

•   Forgiveness: If you have federal student loans, you may want to consider looking into student loan forgiveness options, which means that you do not have to repay your loans in part or full if you meet specific requirements. For example, you may be able to tap into teacher loan forgiveness, Public Service Loan Forgiveness (PSLF), income-driven repayment plans, military service, AmeriCorps, or other options.

•   Deferment or forbearance: Deferment and forbearance allow you to temporarily postpone or reduce your payments. Borrowers with federal loans may qualify to defer repayment due to cancer treatment, economic hardship, graduate school, military service and post-active student duty, rehabilitation training, unemployment, and more. Private lenders may have their own programs for forbearance. Check-in with your private lender directly.

•   Talk to your lender or loan servicer: You can also talk through all your payment options with your loan servicer. If you’re having trouble making your payments, explain how and why (and be prepared to show proof).

The Takeaway

Borrowers with a low credit score (a bad credit score is defined as a FICO score below 670 or a VantageScore below 661), may find it challenging to get a student loan refinance with bad credit without a cosigner.

However, there are other avenues you can take for student loan refinancing with bad credit, including improving your credit score, improving your DTI, researching options with a credit union, non-profit debt consolidation, or getting a secured loan. You may also want to consider alternatives to refinancing private student loans with bad credit if you have federal student loans, through consolidation, forgiveness, deferment, or forbearance. You may also try talking to your lender or loan servicer for all your options, asking them about alternative options to refinance a student loan with bad credit.

When you refinance student loans with SoFi, the application is completed entirely online and there are zero fees. Qualifying borrowers can secure competitive interest rates.

Get prequalified in just a few minutes.


3 Student Loan Refi Tips

1.    The main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.

2.    When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but the significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

3.    It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to career services, financial advisors, networking events, and more — at no extra cost.


Photo credit: iStock/Vladimir Vladimirov

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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.

CLICK HERE for more information.


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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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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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.
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