Focus on Refinancing Your Student Loans

Not learning how to properly manage student debt can lead to missing out on significant savings or inadvertently damaging credit standing. Our academic experts share insights and strategies for refinancing student loans to maintain a strong credit profile even after college.

Refinancing Student Loans Without Hurting Your Credit

To refinance student loans without hurting your credit involves securing better interest rates, finding various lenders, applying with a co-signer, and improving your credit score. Choosing lenders, consolidating loans, using automatic payments, and improving your cash flow can help optimize your loan terms while minimizing negative impacts on your credit.

For many students, loan repayment can be a complicated and costly undertaking that includes multiple lenders, monthly repayment commitments, and various deadlines. Read on to find out if refinancing makes sense for your future!

How Does Student Loan Refinancing Work?

Student loan refinancing converts multiple federal and private student loans into a single monthly payment. While federal student loan consolidation may be an option for multiple federal loans, this is not usually an option for borrowers with multiple loans from both public and private lenders.

Your federal loan may allow you to enter into an income-driven repayment plan. This guarantees that your monthly loan repayments don’t exceed a threshold that is determined by your actual income. In this case, the federal loan provides certain assurances in the case of lost income or financial hardship.

To refinance your loans, you’ll need to determine whether you:

• Would actually benefit from the refinancing process.
• Are eligible for refinancing based on your financial outlook.
• Can receive favorable repayment terms.

What Are the Benefits of Loan Refinancing for Students?

The number one reason to refinance your loans is to save money. Loan refinancing is a good option for borrowers with multiple student loans and a steady income. Refinancing student debt may be an especially good option for borrowers with a combination of federal student aid and private student loans.

• Refinancing consolidates multiple monthly payment plans into a single monthly installment plan. This makes it easier to schedule, manage, and afford your monthly loan responsibilities.
• By lowering your payment responsibilities, you lower the risk of financial hardship and defaulting on any of your loans.
• Lowering your payment also decreases your debt-to-income ratio (DTI), which is an important factor in determining your eligibility for future lending opportunities.
• Your loan should also offer a lower interest rate than your existing loans, which will ultimately save you money across the duration of the loan.

Should I Refinance My Loans?

In order to determine whether or not you should refinance your loans, you should be sure that it will ultimately save you money. There are three questions you must ask first:

1. Do I have multiple loans to repay through both private and federal lenders?
2. Can I lower my interest rate by refinancing?
3. Will refinancing result in the loss of federal loan protections or the loss of opportunities for loan forgiveness?

Refinancing is most valuable to those who are managing multiple monthly payments, especially in cases where private loans may prevent you from enjoying the benefits of total federal consolidation.

Presuming these three conditions — that you are carrying several loans; that you do find a lower interest rate; and that you don’t already enjoy protections or benefits on your federal loan — you would likely benefit from refinancing.

How Can I Qualify for Loan Refinancing?

Lenders will use your credit score and income to determine your actual ability to pay your loans. You will likely qualify for loan refinancing if you have:

• Good credit
• A paying job
• A low debt-to-income ratio

Lenders will also look closely at your debt-to-income ratio (DTI) — which is the balance between your income and your monthly debt payments. A DTI of higher than 40% (which indicates that more than 40% of your monthly income is spent paying debts) would likely limit your opportunities for student loan refinancing.

Some lenders may place limits on balance size. When your student loan burden exceeds this threshold, you may not be able to consolidate the sum total of your loan debt.

Certain lenders may also require you to have graduated or to have earned a specific degree level, to be eligible for refinancing. This is because borrowers who do not complete college or earn a degree are at a higher risk of financial hardship, missed payments, and defaulting.

How to Refinance Student Loans While Minimizing Credit Impact?

Refinancing is typically offered by lenders who are willing to consolidate both your federal and private student loans into a new loan with a single monthly repayment plan. Knowing the different ways to refinance loans can help you optimize your financial situation and attain your dream degree without compromising long-term creditworthiness.

1. Find Better Interest Rates

Refinancing can reduce your loan cost and potentially shorten your loan term. Your interest rate eligibility will depend on your credit rating, income, and DTI. Interest on refinanced loans will typically range between 3% and 13%.

2. Change Lenders

Another way to minimize the impact on your credit report is by applying to a different lender within a short timeframe, typically 14 to 30 days. These inquiries are often treated as a single inquiry for credit scoring purposes.

3. Apply With a Co-Signer

Look for a co-signer with a strong credit history to help secure better refinancing terms without heavily relying on your own credit reports. This is particularly beneficial if you have a history of late payments that might otherwise limit your refinancing options.

4. Improve Your Credit Scores

Your credit score is the single most important determinant of your eligibility for loan refinancing. Lenders view your credit score as an indication of your ability to repay your debt and will use this figure to calculate the risk of taking on your loans.

When you’re viewed as a high risk, lenders will either be unwilling to take on your loans or will only do so at a higher interest rate. Most lenders require a minimum credit score of 650 to 680 before considering your eligibility. The higher your credit rating, the more likely you are to qualify for a favorable interest rate.

5. Shop Around For Lenders

Unlike many private lenders who primarily focus on credit scores for personal loans, some cash flow lenders consider your income and ability to repay. These may offer refinancing options with less impact on your credit through soft credit pulls for initial rate quotes.

6. Improve Your Cash Flow

As you lower your total monthly debt payments and set up automatic payments, you can improve your cash flow and consistently meet payment deadlines. This can positively impact your credit report over time.

7. Consolidate Multiple Debts

Try to consolidate loans through refinancing to streamline your debt management. This can reduce the risk of missed payments due to multiple due dates.

In effect, it can maintain or improve your credit score as consistent on-time payments. However, consolidating your loans with a private lender will result in the loss of any protections or forgiveness opportunities on a federal loan.

Can I Refinance My Student Loans if I Have Bad Credit or No Credit?

Suppose you have a history of late or missed credit card payments, bad debt referred to a collection agency, or you’re carrying an exceptionally high debt balance. Your credit score may prevent you from qualifying for loan refinancing. As a result, you may not qualify for loan refinancing.

It’s also possible that a very limited credit history could prevent you from qualifying for refinancing. For instance, recent graduates who haven’t yet held a credit card or auto loan may lack a complete credit history. This limited data makes it harder for a lender to evaluate the risk of lending to you.

You do have the option of securing a co-signer with a full credit history and a good credit rating. Your parents or spouse may be a good candidate for co-signing on your refinanced loan. When you don’t have a cosigner, you may consider embarking on an effort to improve your credit rating.

• Sign up for a free credit monitoring service like Credit Karma or Credit Sesame and begin tracking your own credit scores.
• Check your credit for free through each of the three major credit bureaus: Equifax, Experian, and Transunion.
• Find, and work to pay off, any bad debts on your credit report.
• Identify and dispute any inaccurate, negative credit alerts.
• Pay your upcoming debts and bills on time, every month.
• Be patient and remain committed to your financial health.

When you do the right things over time, your credit score will eventually improve. You can revisit the idea of refinancing your loan when your credit rating is ready.

Does Refinancing Loans Hurt My Credit?

In general, refinancing your student loans will not significantly impact your credit rating. However, when you submit an application for loan refinancing, this will prompt a “hard credit inquiry”. Typically, this inquiry will result in a roughly five-point drop in your credit rating.

When you can limit yourself to just a single application, the impact on your credit score will be minimal. To prevent any negative impact on your credit rating, make sure you:

• Only submit your application for refinancing after conducting extensive research on the best opportunities.
• Continue to repay your debt on time until your application is approved and your new loan repayment period begins.
• Maintain timely and full payment throughout the life of your refinanced loan.

Can Refinancing Hurt My Federal Student Loans?

While student loan refinancing can be beneficial to the right borrower, there are drawbacks for less-than-ideal borrowers. Avoid refinancing if you are already far enough along on the path toward forgiveness.

When enrolled in a loan forgiveness program that would eliminate the remaining total of your loan debt after meeting certain conditions, or exceeding a certain number of years, refinancing would eliminate this possibility.

You may want to consider a federal income-driven repayment plan in lieu of loan refinancing if you lack stable, long-term employment security.

What Is the Best Company to Refinance My Student Loans?

The best company to refinance your loans is the company that will give you the most favorable conditions. These include lower monthly payments and a number of protections in the event of financial hardship.

Based on interest rates, flexibility, and consumer protections, these are our top student loan refinance companies:

• RISLA: Best overall
• Splash Financial: Best interest rate
• SoFi: Best benefits
• Discover: Best for no fees
• Citizens: Best for borrowers who didn’t graduate
• PenFed Credit Union: Best for spousal loans
• Laurel Road: Best parent loan refinancing

Related Questions

How Can I Improve My Credit Score?

To improve your credit score, focus on paying bills on time, maintain a positive payment history, and keep your credit utilization ratio low by using less than 30% of your available credit. Additionally, regularly check your credit reports from each appropriate credit bureau.

Can Refinancing Help My Credit?

Refinancing can potentially help your credit in the long run by lowering your monthly payments, making it easier to pay on time, and improving your FICO score. However, in the short term, the hard inquiry and new account associated with refinancing may temporarily lower your score.

What Are Alternatives to Refinancing Loans?

Alternatives to refinancing loans include income-driven repayment plans, deferment or forbearance options, and exploring loan forgiveness programs. You can pursue these without a new loan application, especially when you improve your personal finance goals.

Conclusion

By understanding the intricacies of refinancing loans for students, even those with less than stellar credit can make informed decisions that align with their personal finance goals. Learning how to refinance your loans can help you take better control of your financial future as you graduate.

For additional tips on managing your loans, choosing a repayment plan, or reducing your risk of default, check out our insights on how to focus on repaying your student loans.