Refinancing your student loans is an excellent option for people with large amounts of student loan debt, especially those with good credit. But what if you have bad credit or even no credit? Can you actually benefit student loan refinancing with bad credit?
If so, is it a smart option?
Why does Your Credit Matter When Refinancing Student Loans?
Credit is simply borrowed money, usually with a bank or another financial institution, used to purchase something or receive a service when you need it. You also have the option to check with a credit union.
That money is paid back to that institution over a predetermined amount of time, usually with interest charges attached. 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. If you are 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.
If you have federal student loans, your credit wasn’t as important when you first received financial aid. Now that you are older and further along in life, lenders view your financial status as the main criteria for approving someone for refinancing. What do lenders look at when determining if you are creditworthy?
Your credit score is determined using five main factors: Payment history (35 percent), credit utilization (30 percent), length of credit history (15 percent), new credit (10 percent) and credit mix (10 percent). The FICO score scale ranges from low credit score minimums like 300 to the top tier credit rating which is 850. Most lenders consider any score under 550 as bad credit. Anything above that gives you a chance to have the credit score needed to refinance student loans. Your credit score is the main criteria lenders look at when approving refinancing an unsecured or secured loan as well as setting terms and interest rates.
Where you are 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. A higher paying career is going to look better to lenders.
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 help you better interest rates when refinancing student loans.
What Does Bad Credit or No Credit Look Like?
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 are able to 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 to have. 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 have 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.
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 are consolidating federal student loans with bad credit, REPAYE 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 after 25 years and it also subsidizes student loan interest for some participants (those with Direct Subsidized Loans, Direct Unsubsidized Loans, Direct GradPLUS loans, Direct Consolidation loans except Parent Plus loans).
REPAYE allows you to have lower monthly payments, with your monthly payment being 10% of your income over 150% of the poverty line. That means if you earn less than 150% of the poverty line, your payment is zero dollars. Remember that if you pursue student loan refinancing, your loans become private and you are ineligible for loan forgiveness and federal IBR plans.
Can You Consolidate Federal Student Loans With Bad Credit?
If you have bad credit, another option for you is student loan consolidation. Although consolidating your 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).
The nice part of this consolidation is that there is no credit check so having bad credit isn’t an issue. It’s possible that your monthly payments will be lowered as well. With direct consolidation loans, you are potentially eligible for some IDR plans still.
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. Most likely you will either get rejected, with end up with a very high interest rate or will be required to get a cosigner with excellent credit.
A high-interest rate isn’t ideal, but remember that you can always apply to refinance again down the road after you have improved your credit, which should lead to a better rate. Some lenders offer a cosigner release after a specified number of on-time payments in a row.
There are a few lenders that are options for people with bad credit. Student Loan Planner has secured bonuses available to our readers from these lenders so If you click on the bonus links and refinance through them, you can earn a bonus.
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. Earnest also doesn’t charge origination fees, application fees or prepayment fees. You also must have a consistent income or a signed job offer for employment starting within six months.
Earnest also has unemployment protection. One thing Earnest doesn’t offer is the option to get a cosigner. Earnest is not available in every state so check their website to confirm if you are eligible. Not only is Earnest is a great option to refinance if you have bad credit, but you can also and receive a $500 cash back bonus using Student Loan Planner’s bonus link (that’s if you refinance more than $100,000. Bonus is $300 for $50,000 to $99,999).
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). Lendkey does not charge origination fees, application fees or prepayment fees. They offer unemployment protection.
Lendkey does require that you have graduated with at least an associate degree in order to be eligible to refinance student loans. Lendkey does allow cosigners and also offers cosigner release. Use our bonus link and receive up to $750 cash back bonus for refinancing through LendKey.
Another refinancing lender for people with bad credit is Credible. Credible is different from other lenders in that it’s more of a third party online loan marketplace. You simply fill out a form on Credible’s website and they send you estimates from multiple lenders that use their 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 cash back.
What If You’ve Declared Bankruptcy?
Are you still eligible to refinance student loan debt if you’ve declared bankruptcy? The answer is yes, but like with most other situations with bankruptcy, you will have to wait an extended amount 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 until after the bankruptcy comes off your credit report (seven years for Chapter 13 bankruptcy and 10 years for Chapter 7 bankruptcy). You will 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 student loan debt? 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 is easily fixable and you can always refinance again after your credit improves. So how do you improve your credit?
Lower Your Debt To Income Ratio
As we discussed earlier, your debt to income ratio is just the amount of revolving debt you have compared to your monthly income. You can improve your DTI 2 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 you have to get rid of that debt. Maybe that will require getting a part-time job or a side hustle. It’s worth it short term 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 or send yourself annoying reminders every month, paying your bills on time every month can have a huge impact on improving your credit.
Use Less of Your Available Credit
Another way to improve your credit is to use less of it. This affects your credit utilization, which lenders often look at when you apply to refinance. Aim to use less than 30 percent of your available credit line, but if you can get even lower, then 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.
Having bad credit or no credit isn’t the end of the world. You may find it difficult to secure student loan refinancing with bad credit immediately or find you are only eligible for a higher interest rate.
You will need to take time to explore if that’s the right option for you or not. If you do end up refinancing your loans, work to improve your credit so you can refinance again down the road and secure the low-interest rate you need to save you thousands of dollars in interest charges and pay off your debt quicker.
Have you ever considered refinancing your student loans? Why or why not?