How To Refinance Student Loans With Bad Credit

When you have good credit, refinancing your student loans to a lower interest rate or more attractive term can be a smart move.

This is especially true when you have private student loans or you don't benefit from paying your federal student loans on an income-driven repayment (IDR) plan due to a high income.

But what if you have bad credit or even no credit? Can borrowers with less-than-stellar credit qualify for student loan refinancing? And even if they can, would it be a good idea to apply? Here's what you need to know.

Note that the COVID-19 pandemic and federal relief measures have impacted many student loan borrowers. To learn more about your options and whether you should consider refinancing now, check out our guide.

Why does your credit matter when refinancing student loans?

Whether you have good or bad credit is generally determined by how well you repay debts, the amount of debt you take on, and the amount of debt you have compared to income.

Bad credit can make refinancing student loans near impossible. And even if you're still eligible, bad credit can make refinancing a more expensive option. When lenders perform credit checks, they often look at many different financial variables to determine if someone is creditworthy.

The Department of Education doesn't factor in your credit when considering your eligibility for Direct Subsidized or Unsubsidized Loans. But private lenders view a borrower's credit status as one of the main criteria for underwriting and approving them for refinancing. What do lenders look at when determining if you are creditworthy for a new loan?

Credit score

Your credit score is calculated using five main factors:

• Payment history (35 percent)
• Credit utilization (30 percent)
• Length of credit history (15 percent)
• New credit (10 percent)
• Credit mix (10 percent)

The FICO score scale ranges from low credit score minimums like 300 to a top-tier credit rating which is 850. FICO breaks down this range into five score categories:

• 800+ Exceptional
• 740-799 Very Good
• 670-739 Good
• 580-669 Fair
• Below 580 Poor

You'll typically need to be in one of the top two tiers (740 to 800+) to qualify for a lender's best student loan refi rates. In other words, you generally need to have excellent credit. You may be eligible for refinancing with a “good” score (670 to 739) but may receive a slightly higher interest rate. However, it becomes much more difficult to qualify for a student loan refinance with a “fair” or “poor” credit score (669 or below).

Employment

Where you're employed and how much you earn can factor into whether you are eligible for student loan refinancing when you have bad credit. Lenders want to make sure that you can pay for your student loan payments on time and can afford the loan amount. A higher-paying career usually looks better to lenders.

Debt-to-income ratio

Debt-to-income ratio (DTI) is exactly what it sounds like. Your DTI is calculated by adding up your monthly expenses, such as credit card debt, student loan debt, and car payments as well as your expected monthly mortgage payment, and then dividing that number by your gross monthly income.

For example, if you have $15,000 of monthly income and $6,000 of monthly expenses from debt, then your debt-to-income ratio is 40%. Having a lower DTI will generally help you qualify for lower interest rates when refinancing student loans.

What causes bad credit?

In order to improve your credit, you need to understand what caused you to have bad credit in the first place. One of the main reasons people end up with bad credit is because they take on too much debt or more debt than they can afford.

Because payment history is the largest factor in determining credit scores, late payments or missed payments have an enormous effect on how lenders view you as a potential borrower.

Perhaps you graduated with a large amount of student loan debt, but your career path hasn’t led to the high-paying job you expected. Maybe you don’t have any credit at all. If you’ve never signed up and been approved for a credit card, don’t have car payments, and have never rented an apartment or had a mortgage, you really don’t have much established credit other than your student loan debt.

Lenders like to see that you've borrowed money and have consistently paid it back on time. Working to improve your credit should be one of your goals regardless if you end up refinancing student loan debt or not.

Related: What Credit Score Is Needed For A Student Loan?

Can you refinance student loans with bad credit?

When comparing student loan refinancing with bad credit to an income-based repayment option, which one is right for you will depend largely on what type of student loans you have. If you have private student loans, refinancing is your best option in almost any scenario. With refinancing, you will have your best chance at a lower interest rate, which can potentially save you thousands in interest charges over the life of your student loans.

If you're consolidating federal student loans with bad credit, REPAYE (soon to be changed to new REPAYE / SAVE. Details to follow.) could be a better option for you. REPAYE is an income-based repayment program offered by the government. With REPAYE, you are eligible for student loan forgiveness in 20 to 25 years. It also subsidizes student loan interest for most participants.

With REPAYE, your monthly payment will be 10% of your income over 150% of the federal poverty guidelines for your family size and state of residence. That means if you earn less than 150% of the poverty line, your payment will be $0.

Remember that if you pursue student loan refinancing, your loans become private loans and you'll become ineligible for loan forgiveness and federal IDR plans. Getting a lower rate and better loan terms can be advantageous, but not if you need lower monthly payments through IDR or Public Service Loan Forgiveness (PSLF).

Can you consolidate federal student loans with bad credit?

If you have bad credit, another option for you is federal student loan consolidation. Although consolidating your qualifying student loans won’t save you money in interest charges, it will make it easier to manage your student loan debt since you would only be making one monthly payment.

If you have federal loans, you should choose a Direct Consolidation Loan backed by the U.S. Department of Education. With a Direct Consolidation Loan, you will receive a fixed interest rate that is a weighted average of all the loans you are consolidating (rounded up to the nearest ⅛ of a percent and NOT a rate discount).

The nice part of this consolidation is that there's no credit check so having bad credit isn’t an issue. Your monthly payments may be lowered, too. And with Direct Consolidation Loans, you'll still be eligible for IDR plans.

What lenders refinance student loans for people with bad credit?

Most lenders have strict eligibility requirements for borrowers that make it near impossible for someone with bad credit to refinance student loans. If you aren't rejected outright, you may end up with a very high interest rate or be required to add a creditworthy cosigner to your application.

A high-interest rate isn’t ideal, but remember that you can always apply to refinance again down the road after your credit has improved. That way, you'll have a lower loan balance and can save money over the life of the loan. Also, some lenders offer a cosigner release after a specified number of on-time payments in a row.

There are a few lenders that offer options for people with bad credit. Student Loan Planner® has secured the highest bonuses you'll find online for readers who use our referral links to sign up with these lenders.

Earnest

One of the most consumer-friendly lenders around is Earnest. Although they have a minimum credit score requirement of 650, Earnest is a good option for people with bad credit because they have no set income requirements.

It also looks beyond a borrower's credit score when making approval decisions, and considers things like the borrowers' employment situation and banking habits.

Earnest doesn’t charge origination fees, loan application fees, or prepayment fees. But you must have a consistent income or a signed job offer for employment starting within six months to qualify for refinancing with Earnest.

Earnest offers generous unemployment protection, but one thing Earnest doesn’t offer is the option to add a cosigner to your refinancing application. Earnest isn't available in every state so check its website to confirm if you're eligible.

Not only is Earnest is a great option to refinance if you have bad credit, but you can also and receive up to a $1,000 cash-back bonus using Student Loan Planner®’s bonus link (that's if you refinance more than $100,000. The bonus is $200 for $50,000 to $99,999).

LendKey

Another good refinancing option for people with bad credit is LendKey. LendKey only requires a minimum credit score of 660 and an income of $24,000 (or $12,000 with a cosigner). Plus, it works with many community banks and credit unions who might be more willing to work with borrowers who don't have sky-high credit scores.

LendKey doesn't charge origination fees, application fees or prepayment fees. And it offers hardships forbearance of up to 18 months.

LendKey does require that you have graduated with at least an associate's degree to be eligible for student loan refinancing. LendKey does allow cosigners and also offers a cosigner release. Use our bonus link and receive up to a $1,250 cashback bonus for refinancing through LendKey.

Credible

Another refinancing lender for people with bad credit is Credible. Credible isn't a direct lender, rather a third-party online loan marketplace. You simply fill out a form on Credible’s website and they send you personalized prequalified rates from multiple lenders that use its platform.

Credible doesn’t necessarily have a minimum credit score or income requirements because they represent multiple lenders. Credible is a great option for people with bad credit because they often find refinancing options for people who’ve been turned away by other lenders. Apply through our Credible bonus link and you can receive a bonus of up to $1,250 cashback. All bonus payments are by gift card. See terms.

What if you’ve declared bankruptcy?

Are you still eligible to refinance student loan debt if you’ve declared bankruptcy in the past? The answer is yes, but like with most other loans, you'll have to wait for a period of time and work yourself back into better financial standing to qualify.

For example, with Earnest, you can qualify for refinancing if you don’t have accounts recently in collections. You also have to wait for the bankruptcy to off your credit report (seven years for Chapter 13 bankruptcy and 10 years for Chapter 7 bankruptcy).

You'll need to research and see if refinancing your student loans makes sense if you’ve declared bankruptcy in the past.

What if you didn’t graduate?

Maybe you didn’t finish school, whether you planned to go back and finish or not? Can you refinance your education loan? Yes, you can through some lenders, but is it the best idea? If you left school early and have student loan debt, the first step is to make sure your loans aren’t in default.

You want to avoid defaulting on your student loans at all costs so make sure you know your repayment options. Often people who leave school turn to forbearance and deferment to avoid having to pay back their loans immediately. They don’t realize that the interest still grows on their account so their situation really isn’t improving.

A better option is to look to change the repayment options if possible. If you have federal student loan debt, your best option is probably to look into an income-driven repayment program like REPAYE.

How to improve your credit

If you have bad credit, you might not get the interest rate you were hoping for when you first thought about refinancing your student loan debt. The good news is that bad credit is something that can be fixed. So how do you improve your credit?

Lower your DTI ratio

As we discussed earlier, your DTI ratio is the amount of debt you have compared to your monthly income. You can improve your DTI in two ways: lower the amount of debt you have or increase your income.

If you have credit card debt or monthly payments like a car, work like crazy to pay down that debt, putting any extra money towards getting rid of that debt.

You may also want to take on a part-time job or a side hustle. Giving up a few nights or weekends in the short-term may be worth it to knock out that debt and improve your DTI.

Pay your bills on time

Do you know how many people hurt their credit just by missing payments or making late payments? Even if you have to automate your payments and use autopay or send yourself annoying reminders every month, paying your bills on time every month can have a huge impact on improving your credit. This is one of the best personal finance hacks to boost credit.

Use less of your available credit

Another way to improve your credit is to simply use less of it. This affects your credit utilization, which lenders often look at when you apply to refinance.

The Consumer Financial Protection Bureau (CFPB) says that consumers should aim to use less than 30% of their available credit. But if you can drop your credit utilization rate even lower, go for it!

Take our student loan refinancing quiz

Still not sure if you should refinance your student loan debt or not? Take a minute and go through our refinancing quiz to see what plan is right for you. Find out what you should do and what lenders might be good options. You can review different repayment terms and repayment plans and find great student loan refinance rates.

Having bad credit or no credit isn’t the end of the world. No matter your past credit mistakes, it's never too late to improve your credit score in the future by following good financial habits.

If you do end up refinancing your loans with bad credit, continue to follow those credit-building habits so you'll have the option to refinance again down the road with a better interest rate or terms.

Have you ever considered refinancing your student loans? Why or why not?