How to Refinance Student Loans With Bad Credit

Refinancing your student loans can offer benefits, including simplified debt repayment and lower interest rates. It can even save you money in the long run. But what if your credit score isn’t up to par?

While challenging, you can refinance student loans with bad credit. We’ll explain what you need to know if you’re considering private student loan consolidation with bad credit or seeking alternatives.

How bad credit affects your refinancing eligibility

Private student loan refinancing allows you to merge multiple loans—including private and federal loans—into one, with potentially more favorable terms and a lower interest rate. However, it often involves getting credit approval. 

Most lenders require a “fair” minimum credit score—in the mid-600s. Bad credit, as defined by FICO, is a score of 579 or lower and generally does not meet the criteria for refinancing.

If your score falls into the lower fair or bad categories, issues related to the five factors that affect your credit score might have led to this. Each factor carries a different weight. 

Here’s how the different factors contribute to your credit score:

• Payment history (35% impact): Missing or making late payments decreases the score.
• Amounts owed (30% impact): High credit balances relative to credit limits signal risk.
• Credit mix (10% impact): Having only one type of credit, such as just student loans, on your credit history may affect the score.
• Length of credit history (15% impact): A short credit history, common for recent graduates, can be detrimental.
• New credit (10% impact): Opening several accounts, such as credit cards after graduation, in a short time lowers the score.

When evaluating you for student loan refinancing, lenders use your credit score to gauge the risk of lending. A lower score equates with higher risk because there is less evidence you can make your loan payments. Meanwhile, the higher your credit score, the greater your approval odds and your ability to lower your interest rate. 

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Biggest challenges

Natalie Slagle

CFP®

One of the biggest challenges is your mental capacity to advocate for yourself. You may have other bills and expenses to cover beyond the student loan. Therefore, consider taking an afternoon at a coffee shop to lay out all the details of your expenses and loans. Getting organized can give you the mental capacity to advocate for yourself when refinancing your student loans with bad credit. Consider the downfalls of private student loan refinancing, particularly if you refinance federal loans. Refinancing federal loans into a private one means you forfeit federal benefits such as access to income-based repayment plans and loan forgiveness programs.

If you have a lower credit score and have federal student loans, federal student loan consolidation is a way to merge multiple loans into one without a credit check. Read more about that alternative below.

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Tip

Not sure if you have federal or private student loans? Visit Studentaid.gov. If you don’t see your loan information, you don’t have a federal student loan. Call the federal student aid helpline at 1-800-4-FED-AID to find out whether your loan is serviced by one of the nine federal student loan servicers. If it’s not, your loan is private. Check your billing statement—if your loan is federal, it will list the servicer and federal student loan program. If it’s private, a private lender will be listed.

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How to refinance student loans when you have bad credit

If you have bad credit, you can take proactive steps to improve your chances of qualifying for a private student loan refinance. Here’s a look at four strategies.

Apply with a cosigner

One of the most straightforward ways to enhance your chances of approval, and possibly obtain a lower interest rate, is to apply for a refinance loan with a cosigner.

A cosigner adds their name to your loan, essentially vouching for you. If you can’t repay the loan, the cosigner agrees to take responsibility. If your cosigner has a good credit score, it can help you secure better loan terms and qualify even if you don’t meet the basic requirements on your own.

However, it’s important to recognize that the cosigner is also taking a risk. Their credit is now tied to this loan, and any missed payments or other negative marks can also lower their credit score. Both parties must understand and agree to this shared responsibility.

Look for a lender with a low minimum credit score

Not all lenders demand a high credit score for approval. Some are more accommodating, evaluating factors such as employment history, income, and savings accounts. Consider these resources to find a lender that might consider your application even with a lower credit score:

• Credit unions: These member-owned, not-for-profit institutions are often more forgiving with minimum credit score requirements, and many offer lower interest rates. Depending on your location, you may have several local credit union options. 
• LendKey: This lender marketplace connects borrowers with credit unions and banks tailored to individual needs. It can be a solid resource for refinancers needing to match with a lender with less stringent eligibility criteria. For more information, see our full LendKey review.
• MPOWER: This lender caters to international students and those with minimal credit history. It has no specific minimum credit score, but late payments or delinquencies can hurt approval chances. You can expect to pay higher interest rates with this lender.

Remember to compare rates and repayment options, and look for a loan that fits your financial needs. If possible, try to raise your credit score before applying.

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About credit unions and alternative lenders

Natalie Slagle

CFP®

If you have a relationship with a lender or credit union, you may be able to explain your situation. Relationships, trust, and stories are still a significant part of the banking world. If you fill out a questionnaire online and get denied, don’t give up. Consider making an appointment with someone at the bank, lending institution, or credit union to explain your situation and see whether they will help you.

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Improve your credit score

A favorable credit score can be the key to securing a loan with favorable terms, including a lower interest rate. Here are three steps you can take to enhance your score:

• Make payments on time: On-time payments can improve the payment history category of your credit report, and avoiding late payments will help prevent negative marks.
• Reduce credit usage: Keeping usage under 30% of available credit is ideal. High balances or only paying the minimum due each month can harm your score. Consider making larger payments to boost your rating.
• Fix credit report mistakes: Review your credit reports from the three major bureaus to ensure accuracy. Have any errors fixed to aid in rebounding your score.

Take these measures to improve your credit score, open more doors to financial opportunities, and ensure you’re eligible for better refinancing options.

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Our expert’s take

Natalie Slagle

CFP®

I recommend focusing on the items that affect your credit score the most, starting with payment history. Get a copy of your credit report and see what payments are showing up late or missed.  You may be unaware you’re making late payments because payments auto-draft from your bank account, but it doesn’t match your statement. Next, focus on the amount you owe. Try to pay down credit cards so the balance is less than 30% of what is available. If that’s not possible, call your credit card company to see if they will increase the available balance. Only do this if you’re confident you will not add to the balance.

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Improve your DTI

The debt-to-income ratio (DTI) compares your monthly income and debt obligations, and a high DTI could be dragging down your score.

Here’s how to calculate and understand your DTI:

1. Tally your total debt: This includes monthly housing costs (rent or mortgage) and other debt payments, such as credit cards, student debt, and car loans.
2. Divide by monthly income: Divide the total monthly debt by your monthly income.
3. Convert to a percentage: Multiply the result by 100 to get your DTI percentage.

For example:

Monthly rent ($1,500) + Student loan payment ($400) + Credit card payments ($500) = Total monthly debt of $2,400

You make $50,000 in annual income.

$50,000 / 12 = $4,167 in monthly income. 

$2,400 / $4,167 = 0.57 or 57% DTI

Many lenders prefer a DTI below 36%. If your DTI is too high, as in this example, you can take steps to lower it:

• Reduce debt: Make extra payments to pay down your balances, even if it’s just $10 per week.
• Earn extra income: Consider working extra hours or taking up side hustles such as babysitting or gig work through platforms including Shipt or Task Rabbit.

Lowering your DTI not only enhances your credit profile but improves your chances of qualifying for student loan refinancing.

Alternatives to student loan refinancing if you have bad credit

Alternative solutions to private refinancing can allow those with lower credit scores to achieve many of the same benefits, particularly if they have federal student loans.

Consider a Direct Consolidation Loan

A Direct Consolidation Loan from the U.S. Department of Education allows you to consolidate all your federal loans into one, simplifying your repayment and helping to manage debt. 

• Eligibility: There is no credit requirement. You must have at least one federal Direct Loan or FFEL Program loan and be in good standing (no past-due payments). Defaulted loans are eligible if you agree to a qualifying repayment plan. Private loans are not eligible.
• How it works: A Direct Consolidation Loan merges all federal loans into one, with a fixed interest rate that equals the weighted average of current rates, rounded to the nearest one-eighth percent.
• Benefits: This simplifies repayment without a minimum credit score through student loan consolidation but may not lower your interest rate.

Enroll in an income-driven repayment plan

Income-driven repayment (IDR) plans are designed for federal student loan borrowers looking to make monthly payments more manageable. These plans can be an alternative to private refinancing when bad credit is a factor.

• Eligibility: Only federal loan borrowers qualify. There is no credit requirement. Income is calculated based on adjusted gross income (AGI) and family size to determine monthly payment amounts.
• How it works: IDR plans calculate monthly payments based on a percentage of your discretionary income. They offer several options, such as IBR and Pay As You Earn (PAYE), each with different criteria and calculations.
• Benefits: Some plans offer forgiveness after 20 to 25 years of on-time income-based repayment. This solution helps make payments more manageable but is not designed to save money like private refinancing.