Student loan refinancing can save you money on interest and simplify your monthly payments by combining multiple loans into one. Depending on how you restructure your debt, the process could even help you pay off your student loans ahead of schedule.
Refinancing your student loans also shouldn’t hurt your credit score — as long as you go about the process the right way. Here’s what you need to know about how to refinance student loans while preserving your credit score.
Does refinancing student loans hurt my credit score?
Refinancing your student loans doesn’t typically cause a great deal of damage to your credit.
The biggest risk is the hard credit check you’ll experience when applying for new credit, but most refinancing lenders offer prequalification when you’re shopping around for rates. This won’t affect your credit at all, because it involves only a soft credit pull. Only if you find an offer you like and move forward with a full application will your chosen lender perform a hard credit check. This hard inquiry could impact your credit score, but typically by fewer than five points.
Even if you submit multiple full applications, FICO combines all the hard inquiries into one for credit scoring purposes, as long as you do them all in a short period of time (for example, 30 days).
Once you’ve refinanced your loans, the same rules apply as any other debt. If you keep making on-time payments, it’ll help boost your credit score. But if you miss a payment, it could drop your score significantly.
It’s also important to note that student loans impact your debt-to-income ratio as well. While that’s not tied to your credit score, it’s an important factor lenders consider if you were to apply for, say, a mortgage, auto loan or credit card. The higher your monthly debt payments relative to your income, the more lenders will view you as a credit risk.
3 ways to ensure that refinancing doesn’t hurt your credit
Refinance student loan credit score requirements aren’t too stringent, but to qualify for the best interest rates, you’ll want to have a high credit score and a solid, stable income. If not, refinancing may not be the right fit for you.
If you do qualify for better terms than what you have now, though, here are some ways you can limit the negative impact of refinancing on your credit score and instead use your new loan to build credit.
1. Complete your rate shopping quickly
Refinancing your student loans is a big decision, so you don’t want to go with the first offer you see. Instead, take time to compare your options and find the lowest interest rate. Many lenders make it easy to prequalify for an offer with no impact on your score.
That said, you won’t get a final offer with any lender until you actually complete an application — so you could find the best offer in the prequalification process, then end up with a higher rate when you move forward to apply.
A full application will require a hard credit check, but FICO won’t count every single inquiry against you as long as it can see a pattern of rate shopping for a single loan. If you have the time, it’s a good idea to apply with multiple lenders to get a better comparison, but to do so within as short a time frame as possible.
Takeaway: Don’t worry too much about applying with more than one lender. Just make sure to do it all in a short period so FICO will combine all applications into one inquiry when calculating your credit score.
2. Continue paying student loans until your student loan refinance is complete
Once the lender has approved your loan application and you’ve accepted the terms, the next step is for the lender to pay off the loans you’ve included in your refinance. This process can take time, though, so it’s crucial that you continue making payments on your current loan until it’s paid off.
If you stop prematurely, your lenders could report late or missed payments to the credit bureaus, which will hurt your credit score.
To be safe, log in to your online account with your original lenders before you make your monthly payment. If there’s still a balance, process the payment. If there’s not, you know that the debt has been moved to your new lender, and you can move on.
Takeaway: Refinancing doesn’t happen immediately after you accept the new loan. Keep making payments on your old loans until you’re 100 percent certain that they’ve been paid off. Any payments made to the old lender after the loan has been paid off will be forwarded to the new lender for a few months after the refinance is complete.
3. Stay current on your refinanced student loan
Just as you don’t want to miss payments on your old student loans, you also must be careful not to skip or make late payments on your new refinance loan.
Missing payments on debt is a surefire way to harm your credit score. Late payments are typically reported once they’re 30 days past due, and they remain on your credit reports for seven years.
That’s why you should choose repayment terms that will work for your budget. Even though it might be tempting to choose a short repayment term so you can pay off your debt sooner, don’t do so if you’re worried about your ability to keep up with payments. If you have trouble keeping track of multiple bills, you can also set up autopay so the money gets transferred automatically each month.
If you do end up with high bills that are difficult to manage, don’t wait until you can’t make a payment to talk to your new lender. Reach out to it to see if it has a hardship program or any flexibility in repayment. Some top student loan refinancing lenders offer forbearance and deferment options and even unemployment protection. Be proactive to make sure that your loans don’t go into default; student loans are difficult to discharge in bankruptcy, and default can have long-term consequences on your credit score.
Takeaway: Make it a priority to stay current on your refinance loan so that you can keep chipping away at debt and building your credit score with on-time payments.
Alternatives to refinancing
While student loan refinancing can be a strategic move for saving money on interest and getting out of debt, it’s not for everyone. If you can’t qualify for a lower interest rate, there might not be much point in refinancing.
What’s more, if you refinance federal student loans, you’ll lose access to certain benefits, including student loan forgiveness, some loan repayment assistance programs, income-driven repayment plans and more.
If you’re not sure that refinancing is right for you, here are a few alternatives to consider:
- Consolidate your federal student loans: In most cases, refinancing and consolidating refer to the same process. But with student loans, consolidation typically refers to the U.S. Department of Education’s Direct Loan Consolidation program. With consolidation, you can combine multiple federal loans into one to simplify your repayment plan. Just keep in mind that your new interest rate will be the weighted-average interest rate of the original loans rounded up to the nearest one-eighth percent, so you won’t save money this way.
- Apply for forgiveness: The federal government offers a few different student loan forgiveness programs. Specifically, you may qualify if you work for a government agency or an eligible not-for-profit organization or as a teacher. Review the Federal Student Aid website for more information about these options.
- Request student loan repayment assistance: If you have federal student loans, there is a long list of loan repayment assistance programs (LRAPs), primarily offered by government agencies and states. These aren’t forgiveness programs, but in some cases, you may be able to get tens of thousands of dollars in assistance.
The bottom line
As long as you go through the process the right way, student loan refinancing shouldn’t have much of a negative impact on your credit score. In fact, making your payments on time on the new loan can help you continue to build a positive credit history.
Before you refinance, though, consider all of your options to make sure that it’s the best fit for you. Even if it’s tempting, the benefit of some government programs can outweigh the perks of a refinance loan.
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