Whether you’re borrowing a new loan or refinancing an existing one, one thing often holds true: The higher your credit score, the better your interest rate. This rule is often the case when it comes to student loan refinancing. Many lenders require borrowers to have good or excellent credit or a FICO score in the 670-850 range, to be eligible for a refinance. Different lenders also have additional credit requirements for borrowers. Here’s what to know if you’re considering student loan refinancing.
Minimum Credit Score to Refinance Student Loans
Since different lenders have varying minimum credit score requirements for borrowers, there’s no one minimum credit score needed to refinance student loans. Instead, you might find that one lender requires a credit score of 670, while another will accept a credit score of 620. Generally, you can expect a higher interest rate if you need to refinance your student loans and your credit isn’t great. Lenders typically view borrowers with lower credit scores as having a higher lending risk, and they compensate for this risk by offering higher interest rates.
Requirements to Refinance Student Loans
Besides meeting a lender’s minimum credit score requirements, borrowers must also meet other eligibility requirements for refinancing student loans. Here are some other factors lenders might include:
- Debt-to-income, or the percentage of your total debts relative to your total monthly income
- Annual income
- Employment history
- Outstanding loan balance
What to Do if Your Credit Doesn’t Qualify for Refinancing
If you’re concerned your credit score will disqualify you from refinancing your student loans, you have a few options. You could find a cosigner or work on your credit and refinance in the future.
Find a Cosigner
A cosigner provides support when you apply for a loan refinance. This person is typically a trusted family member or friend with solid credit who cosigns your loan application. If you opt for student loan refinancing with a cosigner, your lender will consider their credit in addition to yours when making a lending decision.
Improve Your Credit Score
Another option is to improve your credit before applying for a student loan refinance. There are many benefits of a good credit score; not only does it make it easier to qualify for loans and credit lines, but it can also simplify the process of finding an apartment or affordable car insurance.
How to Improve Your Credit Score Before Refinancing
If you’re uncomfortable using a cosigner, here are some actionable tips to improve your credit.
Make On-Time Payments
Your payment history significantly impacts your credit score, accounting for 35% of your overall FICO score. If you’ve missed payments or paid late in the past, aim to make all your monthly payments on time moving forward. Doing so could result in an eventual boost to your credit.
Pay Down Credit Cards
Credit utilization, or the amount of credit you’re using relative to the amount you have, is also a critical factor in major credit scoring models. Experts recommend keeping credit utilization under 30%, but generally, the lower your credit utilization, the better.
Maintain Your Credit History
Average account age also factors into your credit score. Opening too many new accounts in a short period can have a detrimental effect, and so can closing older accounts. So it’s wise to avoid opening up too many new credit cards and keep older cards open even if you’re not using them.
Become an Authorized User
Another way to boost your credit is by becoming an authorized user on a close family member or friend’s credit card. For instance, if you have a family member with strong credit and a history of on-time payments, you might ask them if you can become an authorized user of their account. As an authorized user, you’ll benefit from their positive payment history, which could help improve your score.
Alternatives to Student Loan Refinancing
If you aren’t eligible for student loan refinancing or it’s not the best option at the moment, you also have some alternatives. Here’s what else you might consider.
Income-Driven Repayment Plans
You might be eligible for an income-driven repayment (IDR) plan if you have federal student loans. As their name suggests, your monthly payments under these plans will be based partially on your income and family size. An IDR plan can help make your payments more affordable if you’re struggling financially. Depending on your situation, you might qualify for one of five different IDR plans:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan): Pay approximately 10% of discretionary income.
- Pay As You Earn Repayment Plan (PAYE Plan): Pay approximately 10% of discretionary income, but never higher than you’d pay with a standard federal student loan repayment plan.
- Income-Based Repayment Plan (IBR Plan): Pay approximately 10% of discretionary income if you borrowed on or after July 1, 2014, but never higher than you’d pay with a standard federal student loan repayment plan. OR Pay approximately 15% of discretionary income if you borrowed before July 1, 2014, but never higher than you’d pay with a standard federal student loan repayment plan.
- Income-Contingent Repayment Plan (ICR Plan): Either 20% or the amount you’d pay on a fixed repayment plan over 12 years, whichever is lower.
Student Loan Consolidation
Student loan consolidation may be another alternative to refinancing if you’re struggling to manage your student loan payments. While consolidating and refinancing both involve replacing an old loan with a new loan, the intent behind the two is typically different. Borrowers often refinance to get a lower interest rate, while those consolidating do so to streamline their monthly payments. You’ll benefit from a single monthly payment instead of several when you consolidate multiple loans into one. Consolidation is available for private and federal student loans.
Forbearance or Deferment
You may be eligible for deferment or forbearance through your loan servicer if you have federal loans. Both involve modifying your student loan payments for a certain time period to help you better manage them if you’re struggling financially. When your loans are in deferment, interest may not accrue depending on your loan type. But interest accrues in nearly all cases when loans are in forbearance.
Student Loan Forgiveness
Depending on your profession or the length of time you’ve been repaying your federal student loans, they might qualify for forgiveness. With student loan forgiveness, you won’t need to repay the amount forgiven with student loan forgiveness. Several options exist, though one of the best student loan forgiveness programs is Public Student Loan Forgiveness (PSLF). This option is available if you work for an eligible employer and have made at least 120 qualifying monthly payments. Career-based programs also include student loan forgiveness for nurses and teachers.
Refinance Your Student Loans with ELFI
If you have decent credit and have decided to refinance your federal or private student loans is the best choice, ELFI can help.* The benefits of refinancing student loans with ELFI are multiple, including competitive rates and flexible terms. The process to refinance your student loans is also simple, and you can apply in just a few minutes.
