How To Refinance Student Loans With Bad Credit: A Complete Guide

Refinancing your student loans can lower your interest rate and monthly payments, but having bad credit — or a FICO score below 580 — can make the process more challenging.

Even with bad credit, you still have options. Applying with a cosigner or taking steps to improve your credit can help you qualify for better terms. This guide will walk you through how to refinance student loans with bad credit, when it makes sense, and strategies to manage your loans effectively.

Can you refinance student loans with bad credit?

It's possible to refinance student loans with bad credit, though it's more difficult. Generally speaking, lenders want borrowers to have good or excellent credit to refinance their student loans. That generally means a credit score in the mid-600s or higher.

“That doesn't mean refinancing is impossible. Some lenders are more flexible with their credit requirements,” says Erica Sandberg, author of “Expecting Money: The Essential Financial Plan for New and Growing Families.”

If you have bad credit, you may have fewer lender options to choose from. You're also likely to end up with a higher interest rate. However, strategies like having a cosigner or improving your debt-to-income ratio can help increase your chances of being approved.

Current student loan refinance rates

Strategies to qualify for refinancing with bad credit

Refinancing can take a bit more planning and forethought if you have bad credit. There are a few strategies that help improve your chances of being approved for a loan and help you get the best loan fees and terms possible.

Apply with a cosigner

One of the simplest ways to refinance your student loans with bad credit is to ask someone to cosign the loan. This person, often a parent, spouse, or another loved one, should ideally have good credit to help you qualify for the loan and land a better interest rate.

While applying with a cosigner can make it easier to qualify, the cosigner carries some risks, and it's important to consider the potential consequences.

“If you go down this road, it will be imperative that you make all of the payments by the due date and satisfy the balance in full,” says Sandberg. “They accept responsibility for the loan if you don't pay. Also, the account will show up on that person's credit report, so if you falter, they will suffer the ramifications.”

Learn More: How To Refinance Student Loans With a Cosigner

Improve your credit score before applying

If you can, consider spending several months improving your credit score before refinancing your loan. Over the long run, you can improve your score by making your monthly payments on time and maintaining a long and diverse mix of credit accounts.

However, there are also a few strategies that can move the needle a bit more quickly:

• Improve your credit utilization: Your credit utilization makes up 30% of your credit score, and improving it can have a fast impact. You can lower your credit utilization ratio by either paying down your revolving debt balances or increasing your credit limits.
• Remove errors from your credit report: Check your credit report to see if there's anything that doesn't belong there that could be bringing down your credit score. Dispute errors with the credit bureaus, and you may see your credit score improve.
• Address past-due accounts: If you have accounts that are currently past-due or in collections, address those before refinancing. While they'll remain on your credit report for 7 years, your score may improve once you're up to date on your payments.
• Become an authorized user: When you become an authorized user on someone else's credit card, you get credit for their responsible credit use. Becoming an authorized user could immediately improve your payment history, credit utilization, and overall credit.
• Get credit for monthly payments: Programs like Experian Boost can improve your credit score by giving you credit for monthly payments that don't typically report to the credit bureaus, such as rent, utilities, and insurance.

Lower your debt-to-income ratio

Your credit score isn't the only factor lenders consider when reviewing loan applications. You'll also need sufficient income and a debt-to-income ratio (DTI) that allows you to make your monthly loan payments. If you currently have a high DTI, consider paying down some of your existing debt.

Improving your DTI could improve your chances of being approved for student loan refinancing. Depending on the type of debt, it may have the added bonus of improving your credit score.

Consider alternative lenders

Most lenders require good or excellent credit to qualify for student loan refinancing. However, some lenders have more lax credit score requirements.

“There are some lenders that specialize in borrowers who have less-than-perfect credit,” says Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.”

“These lenders do not specifically offer student loans so much as general loans, but they may be available as an option for borrowers who previously encountered financial difficulty but who are trying to turn their lives around,” he adds.

Pros and cons of refinancing with bad credit

Before refinancing your student loans when you have bad credit, make sure to learn about both the pros and cons to weigh your options.

If you have several student loans, refinancing can help you consolidate your debts into just one loan and monthly payment, streamlining your finances. Depending on your situation, you may also be able to land a lower interest rate and monthly payment — this is especially likely when applying with a cosigner with good credit.

On the other hand, refinancing with bad credit is more challenging and often more expensive. You can expect to get a higher interest rate and, depending on your lender, higher loan fees.

Additionally, if you're refinancing your federal loans into a private loan, you'll lose out on major benefits. For example, federal loans come with perks like possible loan forgiveness, income-driven repayment plans, and options for forbearance and deferment.

How to choose a lender for bad credit

When you're shopping around for student loans with bad credit, you may have fewer options. However, you should still be selective about the lender you work with and compare multiple rate quotes to ensure you're getting the best deal.

Many lenders allow you to prequalify for a loan with an impact on your credit. This can help you get an idea of whether you'll qualify and what rate you might get. You can also use a loan marketplace like Credible to compare multiple loan options and rates at once.

If you're applying without a cosigner and have fair or poor credit, you may need to consider alternative lenders. However, when applying with a cosigner, you can choose from many of the top lender options, including SoFi, College Ave, and ELFI.

Tips for managing student loans with bad credit

If you have bad credit, it's especially important that you take certain steps to manage your student loans. By doing so, you can improve your credit score and lower your loan costs, both now and in the future.

1. Stay current on payments

One of the most important steps in managing your student loans, regardless of your credit profile, is to stay current on your payments. Even one missed payment can negatively impact your credit even more. And defaulting on your loans can cause long-term harm to your credit and cost you far more money.

To help you avoid late or missed payments on your student loans, Kantrowitz recommends setting up autopay.

“This reduces the likelihood that they will be late with a payment,” he says. “Some lenders will even provide a small interest rate reduction as an incentive.”

It's also important to create and stick to a monthly budget to ensure you have money available for your loan payments. The last thing you want is for your automatic payment to fail because you don't have sufficient funds in your checking account.

2. Explore income-driven repayment plans

Before you refinance your student loans, especially if you have federal loans, it's worth considering whether there are better options.

For example, if you have federal loans, you may be eligible for income-driven repayment plans. These plans limit your monthly payments to a percentage of your income, ensuring they remain affordable. Contrast that with private loans, which typically have no such option.

Income-driven plans often result in higher long-term interest costs since it takes you longer to repay your loans. However, if you have a limited income, these plans can help save your finances and prevent further damage to your credit.

3. Use tools to monitor and improve credit

Staying on top of your credit can help improve it over the long term. First, it's important to know where your credit score stands and what's contributing to that score. For example, do you have late or missed payments on your credit report? Are there accounts in collections? Is there a high credit utilization? Once you know what's keeping your credit score down, you can start taking steps to fix it.

You should also consider using a credit monitoring service. These services alert you when anything changes on your credit report, and also provide tips to help improve your credit based on the unique contents of your report.