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Student Loans Student Loan Repayment

How to Refinance Student Loans With Bad Credit

Updated May 02, 2023   |   7 mins read

Student loan debt is a given nowadays. Borrowers owe a combined $1.4 trillion and many of them take 20 years or more to pay it off. Getting rid of student loan debt can take even longer if you have bad credit. That’s why many borrowers choose to refinance their student loans.

Refinancing can simplify debt repayment, secure lower interest rates, and save you money in the long run. Refinancing student loans with bad credit can be difficult, but it’s not impossible. There are steps you can take to simplify repayment, qualify for refinancing, and improve your credit.

This guide will explain how to refinance student loans if you have bad credit and offer some good alternatives if you don’t qualify.

In this guide:

How to refinance student loans with bad credit

Your credit reputation precedes you when it comes to borrowing money.

If you’re trying to refinance a student loan with bad credit, it’s a huge red flag for lenders. It basically tells them you’re not good with money, so they impose a variety of limitations and eligibility requirements to protect themselves from bad borrowers.

However, if you’re committed, there are steps you can take to improve your chances of qualifying for a student loan refinance.

Boost your credit score

A good credit score can open many doors in life, whereas a bad one can keep many of them closed. Maintaining and improving your credit score will give you the edge you need to secure a loan—and hopefully one with a lower interest rate.

Many factors have an impact on your credit score, but these are the most common:

  • Payment history
  • Credit utilization
  • Credit mix and types
  • Length of credit history
  • Negative marks
  • Hard inquiries

Some of these factors matter more than others. For instance, any negative marks, such as late payments or loan defaults, will affect your score more than the number of accounts you have open.

Here are three ways you can improve your credit score:

  • Make every payment on time. Making on-time payments is crucial. Avoiding late payments should help you gain points in the payment history category and help reduce negative marks.
  • Reduce your credit card usage. Using more than 30% of your available credit, carrying high balances, and not paying off your card every month can harm your score. Instead of paying the minimum amount due every month, try making larger loan payments to help boost your score.
  • Fix mistakes on your credit report. Obtain a free credit report from the three major credit bureaus to verify that all of the information is correct. Have any mistakes fixed so your credit score can rebound.

Apply with a creditworthy cosigner

When refinancing, your goal should be to acquire a new loan with a better rate and repayment terms than your current one. If you have bad credit, you may want to find a cosigner to increase your chances of getting approved.

A cosigner puts their name on the loan next to yours and agrees to pay the loan back if you can’t. And if they have a good credit score, they can help you get better loan terms and qualify if you don’t meet the basic eligibility requirements.

Just be mindful that a cosigner is putting their credit on the line, and any late payments or derogatory marks will affect their credit, too.

Improve your DTI

Your credit score could be weighed down by a high debt-to-income ratio (DTI). Your DTI compares your income and debt. To calculate your DTI, tally your monthly housing costs (rent, mortgage), other debt payments (credit cards, student debt, car loans, etc.) and divide it by your monthly income.

For example, if your monthly rent is $1,500 plus a $400 car loan and $500 in credit card payments, then your total monthly debt obligation is $2,400. If you make $50,000 a year, divide it by 12 months for a total monthly gross income of $4,167. Now divide $2,400 by $4,167 to get your DTI: 0.57 or 57%.

Lenders prefer borrowers to stay below 36% DTI. So in this example, the DTI is too high.

You can lower your debt-to-income ratio by reducing debt and earning extra income. Try to make extra payments toward your debt, even it’s only $10 a week. Also consider working extra hours or taking up a side-hustle like babysitting, Shipt, or Task Rabbit to increase your income. 

Look for a lender with a low minimum credit score

The good news is that not all lenders require a high credit score. Some are more forgiving and use alternative indicators to assess a borrower’s financial situation. Lenders can evaluate factors like employment history, income, and savings accounts to ensure a borrower is a safe credit risk.

It may take some digging, but there are lenders willing to refinance student loans with bad credit. A good place to look first is credit unions.

They are member-owned, not-for-profit institutions focused on helping their members get financing. They generally have low minimum credit scores and low interest rates. 

If you’re interested in finding a credit union for student loan refinancing, check out LendKey, a service that pairs you with credit unions and banks based on your situation. You can learn more about it in our full LendKey review.

Whether you look to join a credit union locally or nationally, always compare rates and repayment options, so you find a loan that saves you money instead of costing more over the life of the loan. You’ll have a better chance of qualifying if you try to raise your credit score before applying.

Alternatives to refinancing student loans with bad credit

If you have bad credit, you might have a hard time qualifying with most private lenders. The tips below offer good alternatives if you have loans from the federal government, but if you’re having trouble repaying private loans, check out our guide to private student loan help.

Consolidating student loans with bad credit

If refinancing your student loans isn’t an option, you might consider a Direct Consolidation Loan from the U.S. Department of Education. This allows you to combine all of your federal student loans into one loan with a single monthly payment. However, private student loans are not eligible.

There is no credit check with a Direct Consolidation Loan, so bad credit won’t be a problem. All your federal loans get combined into one loan with a fixed interest rate equal to the weighted average of all your current loan interest rates rounded to the nearest one-eighth percent.

While it may not lower your monthly interest rate or save you money, it will simplify your repayment and help you better manage your debt.

The catch is that you need to be in good grace on your loans and have at least one Direct Loan or FFEL Program loan. You can still acquire a Direct Consolidation Loan if you’ve defaulted, but you’ll have to agree to a qualifying repayment plan.

Enrolling in an income-driven repayment plan

If you’re having trouble making the monthly payments on your federal student loans, then an income-driven repayment plan might be right for you. These plans offer lower monthly payments that line up with your income so you can afford to make your payments on time.

What’s even better is that some plans offer student loan forgiveness after you’ve made loan payments for 20 to 25 years. These plans are only good for federal loans and aren’t designed to save you money, but rather help you make your payments and not default on your loan.

>> Read More: Scenarios where you can refinance student loans