You’ve probably heard that student loan refinancing may lower your monthly payments. You may have even committed to refinancing your student loans, but you’re not sure whether your credit score is high enough to qualify.
Student loans — and refinancing — will impact your credit score, and it’s important to understand how before you make decisions about your student debt.
How student loans affect your credit score — good and bad
How student loan refinancing affects your credit score
How to keep student loans from hurting your credit score
Is refinancing your student loans worth the credit score hit?
How student loans affect your credit score
Good
If you make your monthly student loan payments on time, you show lenders you can use credit responsibly.
Student loans enable you to have a better credit mix if you also have a credit card, mortgage or auto loan (among other things), demonstrating that you can effectively manage different types of debt. Payment history and credit mix affect 45% of your credit score combined. These two areas are important as you try to raise your credit score.
Because you’ll probably be paying your student loans for several years, you also will have time to build a significant credit history — this is also important, as the length of your credit history makes up another 15% of your credit score.
Bad
If you make late payments or go into default, your credit score will take a serious hit. A missed payment can stay on your credit report for up to seven years, although the negative impact will decrease over the years.
Just one missed federal student loan payment could impact your credit score, as that will send your loan into delinquency. If you are more than 90 days late on a payment, the loan servicer will report your delinquency to Experian, Equifax and TransUnion, the three major credit bureaus. As a result, your credit score will drop.
The penalties can be even more severe on private student loans, since credit bureaus could be notified after even one missed payment — you could also face late penalties.
Some borrowers also worry that high amounts of student loans might hurt their score. However, student loans are not factored into your credit utilization, which tracks how much revolving credit you’re using compared to how much credit you have available. And while student loans are factored into your debt-to-income (DTI) ratio, this ratio isn’t factored into your credit score. However, lenders do look at your DTI when deciding to approve you for credit.
Note that if your parents have taken out a Parent PLUS loan to help with your college expenses, late payments will only impact your parents’ credit score, even if you are contributing to the monthly payments.
How student loan refinancing affects your credit score
Now that you know how your student loans can affect your credit score, let’s talk about how refinancing your student loans can impact your score.
1. You can qualify for refinancing without hurting your credit score
Many student loan refinancing lenders, including Earnest and LendKey, don’t perform hard credit pulls before showing you offers. That means you can see APRs and terms for which you might qualify without hurting your credit score.
What happens is a soft credit pull, which is a way for lenders to put together a prequalification offer for you without having to request your credit report.
This gives you a chance to collect offers from more than one lender. After reviewing your offers, you can compare them before applying for your best offer. Keep in mind, however, that the offers you’re shown and the terms you qualify for once you officially apply can be different.
2. You can increase your approval chances by paying down revolving debt
If your credit score is preventing you from being approved for refinancing and you’re carrying a balance on your credit card, there’s a simple way to boost your score.
Reduce your credit card debt as much as possible before you reapply for refinancing. This will lower your credit utilization ratio, which in turn boosts your your credit score. A low credit utilization ratio can show lenders that you are managing your budget well and not taking on additional credit card debt each month.
Aim to keep your credit utilization at 30% or less. In fact, if you aren’t carrying a balance on your credit card right now, keep it that way for a billing cycle before you apply for student loan refinancing — if you can wait. That way, your balance will be reported as lower when refinancing lenders pull your credit report.
3. Auditing your credit report can increase your chances of approval
Another way to improve your chances of approval is to audit your credit report. You can get a free copy of your credit report from each of the three bureaus every 12 months at AnnualCreditReport.com.
Auditing your credit report could uncover errors you didn’t know about or past debts that were sent to collections. Even a bill you forgot about from years ago could show up on your report.
If you do see an error or fraudulent account on your credit report, dispute it immediately. Once your credit report looks good, you could check your credit score for free through My LendingTree.
4. Refinancing student loans won’t have lasting damage on your score
When you think about refinancing (or consolidation) and credit scores, don’t sweat the effects on your credit too much. While applying for a new loan will impact your score, the damage won’t be that bad.
A credit inquiry will generally only lower your FICO® Score by less than five points. But the real danger comes when you formally apply for a lot of credit at the same time, because those point deductions from credit pulls could start adding up. That’s more reason to collect prequalification offers from lenders, and then apply for your best offer.
However, if you apply for the same kinds of loans within a short period, your credit will be minimally impacted. FICO considers similar credit inquiries within a 14- to 45-day window as one.
As for the effect of taking on new debt, it’s a bit of a wash. Your refinanced student loan will immediately be used to pay off your current student loan or loans. Therefore, your debt amount will remain the same.
How to keep student loans from affecting your credit score
If you do get into trouble making your federal student loan payments, the government offers several programs that will temporarily suspend your payments, reduce the amount of your payments or forgive your loan balance entirely.
Taking advantage of these programs can save your credit score. If you are struggling with your loan payments, immediately contact your loan servicer. Here are some of your options:
- Deferment: This could be a viable option for students, as well as parents with PLUS loans (depending on eligibility). Deferment gives borrowers a period of up to 36 months where they don’t have to make student loan payments. Borrowers may owe interest that accrued during deferment based on the type of loan.
- Forbearance: Forbearance is similar to deferment, but you are eligible for only up to 12 months at a time. Unlike deferment, interest accrues on all types of federal loans during this period.
- Loan forgiveness: Borrowers who work in certain professions, such as teaching or in a public service field, may be eligible for loan forgiveness. Your loan servicer can check if you qualify.
- Income-driven plan: The remaining balance on an income-driven loan repayment plan is forgiven after the repayment period, which is 20 or 25 years.
Is refinancing your student loans worth the credit score hit?
As important as it is to understand refinancing and how student loans affect credit scores, it’s even more important to remember why you wanted to refinance your student loans in the first place.
Ultimately, refinancing student loans can be about getting a lower interest rate so you may pay off your student loans faster or make lower monthly payments. Either way, paying less in interest can be more beneficial than losing a few points on your credit score.
It’s easy to get caught up in the race for the best credit score possible. Just don’t let it lead you to decisions that are bad for your bottom line. Learn to balance the two for your best financial outcome.
Marty Minchin contributed to this report
Interested in refinancing student loans?
Here are the top 9 lenders of 2021!| Lender | Variable APR | Eligible Degrees | |
|---|---|---|---|
 | 1.88% – 6.15%1 | Undergrad & Graduate | |
 | 1.88% – 5.64%2 | Undergrad & Graduate | |
 | 1.88% – 5.64%3 | Undergrad & Graduate | |
 | 2.50% – 6.85%4 | Undergrad & Graduate | |
 | 2.25% – 6.39%5 | Undergrad & Graduate | |
 | 1.90% – 5.25%6 | Undergrad & Graduate | |
 | 1.89% – 5.90%7 | Undergrad & Graduate | |
 | 2.39% – 6.01% | Undergrad & Graduate | |
 | 2.13% – 5.25%8 | Undergrad & Graduate | |
| Check out the testimonials and our in-depth reviews! 1 Important Disclosures for Splash Financial. Splash Financial DisclosuresTerms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice. To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit. Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021. 2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest. Earnest DisclosuresInterest Rate Disclosure Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.59% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions. Auto Pay Discount Disclosure You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. Student Loan Refinancing Loan Cost Examples These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product. Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America. © 2021 Earnest LLC. All rights reserved. 3 Important Disclosures for Navient. 4 Important Disclosures for CommonBond. CommonBond DisclosuresOffered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation. 5 Important Disclosures for SoFi. SoFi DisclosuresFixed rates from 2.74% APR to 6.74% APR (with autopay). Variable rates from 2.25% APR to 6.39% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 6 Important Disclosures for LendKey. LendKey DisclosuresRefinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution. Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810. As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay. 7 Important Disclosures for Laurel Road. Laurel Road DisclosuresAll credit products are subject to credit approval. Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com. As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount. Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate. Interest Rate: A simple annual rate that is applied to an unpaid balance. Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%. KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. This information is current as of April 29, 2021. Information and rates are subject to change without notice. 8 Important Disclosures for PenFed. PenFed DisclosuresAnnual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. |
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