One of the dilemmas facing people who have large student loan debt is the difficulty in refinancing student debt. They seek to move their existing notes to loans with both lower interest rates and lower monthly payments. The problem is, refinancing generally requires either good or excellent credit. The credit score requirement may be too high for most recent college graduates.
So, does that mean that you shouldn’t even try to refinance your student loans if you have anything less than a credit score of 700? Well, in some cases, you may need to wait until your credit score is that high. But industry trends are making this less necessary for certain borrowers. Here, we’ll explore industry trends to look at exactly how your current credit score may affect your ability to refinance your student loans.
Refinancing and Credit Pulls
If you know much about credit scores, you know that applying for new credit — including refinancing — can ding your credit score. But don’t be overly concerned that applying for a student loan refinance will necessarily make your credit score worse.
The only negative that occurs as a result of applying for a new loan is an inquiry appearing on your credit report. An inquiry is a request by a legitimate business to check your credit. But many lenders do what is known as a soft credit pull, which doesn’t show up on your credit report at all.
But even if the potential lender does a “hard credit pull,” resulting in an actual inquiry, it still may not count against you, or at least not heavily. Fortunately, your FICO score calculation recognizes when you’re shopping for a loan. As such, your score considers all inquiries within a 45 day period for a mortgage, an auto loan or a student loan as a single inquiry. And that inquiry is likely to result in a hit to your credit score of no more than five points at worst. So, have no fear of applying to refinance your student loan debts.
But how will your credit scores affect refinancing student debt?
An Unpleasant Truth: Getting into Student Loan Debt Is Easier Than Refinancing
Getting student loans as a student is typically a pretty easy affair. That’s because as a student, you’re not required to be either credit- or income-qualified to take out a student loan. On certain loans that do require credit and income verification, students can usually take them out by simply adding a cosigner.
Refinancing, on the other hand, is not nearly that simple. Once you finish school and you’re out in the workforce, lenders will expect you to qualify for a refinance of your student loan in the same way that you would need to qualify for any other type of loan that you might take.
It’s not unusual for recent graduates, especially, to have a low credit score and an income that’s too small to make payments on large student loan debts. Even with flexible student loan repayment options on federal loans, these loans can be hard to repay. And if you’re struggling to make your payments, you may be unqualified to refinance into a more suitable arrangement.
How Your Credit Score Affects Refinancing Student Debt
Here’s the really bad news on student loan debt refinancing: you must have good to excellent credit in order to qualify.
Many of the larger student loan debt refinancing organizations will follow this same standard. However, more banks and credit unions are coming on board with refinancing student loans, and some have slightly lower credit requirements. For instance, Citizens Bank, which offers student loan refinancing, has a minimum credit score requirement of just 660.
Even 660 is fairly high for a new graduate who hasn’t had much time to build a good credit history. But it makes sense that lenders require this level of financial reliability, especially since student loans often represent a huge debt.
Bottom line here is that your credit score’s effect on your ability to refinance your student debt is either/or: Either you have good enough credit, or you won’t get the loan.
Your Credit Score and Your Refinancing Rate
Even if your credit score is high enough to refinance your student loans, just how high your score is will affect your refinancing rate. Just how much do your scores affect the rate you’ll pay on a student loan refinance?
Unfortunately, the lenders offering student loan refinancing aren’t exactly forthcoming with this information. Unlike many peer-to-peer lenders, they don’t publish rate charts that indicate what credit score will get you what interest rate. Instead, they’ll only provide you with a rate offer after you actually apply for a loan.
This is not an unreasonable request, either. Given the size of many student loans, lenders use various criteria in determining what your rate will be. Credit is just one aspect. Others include the term of the loan, your overall debt-to-income ratio, how much debt you have apart from your student loans, and your career and income level. All these factors have an impact on the rate that you’ll pay.
Many student loan refinancing programs will put you at a lower interest rate than the government’s standard student loan rates. So how much does your credit score actually matter here?
SoFi, for instance, currently offers fixed loan rates between 3.49% APR and 8.074% APR, so we’re talking about a spread of 4.584% between the two.
Presumably, a credit score of about 700 could net you a 6.74% interest rate. On a $50,000 loan with a 20-year repayment term, that would result in a payment of about $380 per month. And you’d pay a total of $41,172 in interest over the life of the loan.
But if you have a perfect 850 credit score, your rate could be 3.49%, which on the same loan would result in a $294 per month payment. This option would also knock your total interest paid down considerably, to about $18,000+.
That’s obviously a huge difference. The complication is that all the other factors—loan term, debt-to-income ratio, and employment situation—also figure into the rate calculation. And how many 20-something and 30-something borrowers have credit scores over 800?
But the news on the credit score front may be moving in a more positive direction.
Credit Scores May Not Be the Be-All They Once Were
Fortunately, some student loan refinance lenders are moving away from total reliance on credit scores in granting loans. It doesn’t open up the door for people with fair or poor credit, but it does provide additional flexibility for people who have average or better credit. This is a positive development, since recent college graduates typically lack the depth of credit history that results in higher credit scores.
SoFi is, again, the prominent example here. Earlier this year, SoFi announced that they are moving away from strict reliance on credit scores. Under the assumption that FICO scores measure past performance and don’t accurately predict future performance, SoFi is moving toward a “holistic” view of borrowers in qualifying for their loans.
SoFi is now moving toward a scoring model that also considers your savings, cash flow, noncredit expenses, and potential future income. They’re specifically evaluating borrowers’ history of responsible bill payments, monthly expenses versus income, and professional experience.
If those factors aren’t in line, it’s possible that SoFi would deny an applicant with a high credit score a student loan refinance.
Another student loan refinance source that has moved away from strict reliance on credit scores is Earnest. Their website says the following:
“Merit vs. credit-score based lending: Traditional lending is primarily done with credit scores, which reflect only a small part of your financial picture. At Earnest we look at additional factors such as your education, employment history, and financial picture in parallel with your credit history. . . For instance, financially responsible young people just entering the job market often do not have a lengthy credit history. This means their credit score will not fairly reflect their actual creditworthiness. At Earnest our mission is to identify the most financially responsible people using all the information they present to us so we can lend to them at the lowest possible rates.”
It’s worth noting that both companies are online lenders, rather than traditional banks. But since change usually comes from the outside in, there’s great potential for a change of heart toward credit scores industry-wide.
What Are Your Options if You Have a Low Credit Score?
Unfortunately, if you have a very low credit score, your options for a private refinance of your student loan are nearly nonexistent. You do still have three options for getting to a lower monthly payment, though:
Add a cosigner to your refinance: If your credit isn’t strong enough for you to qualify for a refinance on your own, you may still be able to get the loan if you can add a cosigner with strong credit. Just understand, however, that this isn’t a cure-all; in adding a cosigner to the refinance, the lender will not simply ignore your own credit standing. Still, it’s always worth a try.
Student loan debt consolidation: If you have federal student loans, you can always do a student loan debt consolidation, rather than a refinance. Consolidations are different from refinances in that they are government loans that don’t actually lower your interest rate, but they do provide payment-related benefits.
A consolidation allows you to consolidate multiple government student loans into one loan with one monthly payment. The interest rate assigned represents a weighted average of the interest rates you’re paying on each of the loans that you currently owe. However, a consolidation can still enable you to lower your monthly payment by extending the term of the loan.
Again, it won’t lower your interest rates the way a refinance will, but it will accomplish the purpose of providing you with a lower monthly payment.
Federal loan repayment options: Even if you don’t consolidate your student loans, you may have the option of choosing a new repayment plan, such as an income-driven plan. These plans can make your payments more manageable without consolidation or refinancing.
These options for lowering your payments on your student debt may help you work towards the goal of an eventual refinance. Making consistent, on-time payments is one of the best ways to increase your credit score. So start by keeping your monthly payments manageable, so that you make them on time each month. Then, once your credit score has increased or you’ve landed that high-paying dream job, you can try to refinance your student loans later on.
If you have been trying to refinance your student loan debt, how has that been working out?Topics: debt • Education