Conquer your student debt. Refinance now.
You probably know that the higher your credit score is, the lower your interest rates are likely to be. But exactly how high does it need to be, and what can borrowers like you do to improve your score and reduce those rates to pay off your student loan debt faster?
We’ll review all the basics and help you understand the minimum credit score requirement to refinance1 student loans.
What credit score do I need to refinance student loans?
To refinance your student loans, you’ll have to submit a new application with a lender regardless of whether you’re refinancing federal student loans or private student loans. Generally, you’ll have to be a U.S. citizen or permanent resident, and most lenders want applicants to have, at the very least, a “fair” credit score of at least 650. That means your loan application may get turned down if your credit score is lower than that, even if you think you’re otherwise quite financially healthy.
It’s important to note that a score of 650 doesn’t automatically qualify you for a loan offer. Whichever company you choose to apply with will have its own criteria for evaluating applicants, and some may want to see higher credit scores.
At Earnest, our eligibility requirements2 to apply for student loan refinancing include a credit score of 650 or above. This falls in the ‘fair’ range for a credit score. Possible scores fall between 300 (poor) to 850 (excellent).
Is it better to boost my credit score before I refinance student loans?
Generally speaking, the higher your credit score is, the lower your interest rates will be. This is because private lenders view people with higher credit scores to be less risky clients. If you have a long credit history, an excellent credit score of 850, and high earning potential, you’re statistically likely to make on-time payments, pay back your loan balance within the initial repayment term, and not default on your debt.
According to Bankrate, credit scores of 740 are seen as “very good,” and scores of 800 or more are “exceptional,” so you’re likely to have access to lower interest rates if your score is within this range.
The differences between interest rates can be substantial, and may add up to thousands of dollars in interest over the life of your loan.
Here’s an example:
Let’s say you want to refinance $10,000 of student loans, and you have a very good credit score — at 841, it’s nearly perfect. You apply to refinance your loans with Earnest, and, great news, you’re offered a fixed rate of 3.24% (including a .25% reduction for signing up for autopay3) for a 5-year loan term4. That’s currently Earnest’s lowest rate available for a fixed loan5.
If you make equal monthly payments over that time, you’ll end up paying back about $10,845.32 in total — at a cost of $845 in interest.
Now, for comparison’s sake, let’s say your credit score is just above the minimum, 667. You apply to refinance some private loans totaling $10,000, and you’re offered a five-year, fixed-rate loan of 12.5%, which is toward the upper edge of the range of rates Earnest currently offers. (Variable APR rates are lower but may change over the life of your loan, so we’re using fixed rates for this calculation, as they’ll stay the same no matter what.)
With equal monthly payments spread out over the five-year term, you’ll end up paying back about $13,500 in total. That’s $3,500 in total interest, and it’s roughly $2,650 more than you would have paid with a lower-rate loan. Plus, your monthly payments will be higher, too.
|Credit Score||Loan Amount||Interest Rate||Monthly Payment (60 total)||Total amount repaid||Total interest paid||Monthly payment diff.||Total cost diff.|
|$180.76||$845.32||$44.22 less||$2,653.44 less|
If your current loans are higher, say $50,000 or more, the difference gets even bigger. Here’s another example, spread out over a 7-year loan period:
|Credit Score||Loan Amount||Interest Rate||Monthly Payment (74 total)||Total amount repaid||Total interest paid||Monthly payment diff.||Total cost diff.|
|$666.09||$55,951.32||$5,951.32||$229.97 less||$19,317.88 less|
Other eligibility requirements for refinancing student loans
If you’re not sure if you have a good credit score or if it’s high enough to get the rate you want, don’t panic. There are lots of ways you can seek additional information, work on boosting your score, and qualify for lower rates.
Lenders look at more than just your credit score, so you may be able to get a lower rate than you think. It’s easy to get a ballpark estimate of what your range could be for fixed and variable rates even without digging into info about your score — it takes just a couple of minutes to calculate your potential offer and savings from Earnest, for example, and it won’t impact your credit score to check.
Once you put in your official application, however (which, disclaimer, will require a hard credit check), you may receive a higher or lower student loan refinance rate based on other information. Earnest knows you’re more than just your credit score, so we look at things other lenders might not. That includes your earning potential, any savings you may have, where you went to school, and more, so you may be able to qualify for a lower rate from Earnest than from other lenders.
All this extra data gives Earnest a better idea of your financial situation, so you can get a fair, customized rate that sets you up for success.
Other things lenders, including Earnest, may look at may include your salary, your debt-to-income ratio (also known as DTI) — how much debt you have compared to how much money you bring in every year — and your employment history.
What to do when your credit score is too low for refinancing
If you check the rates available to you and aren’t happy with what you see, try not to stress. You can refinance at any time during the life of the loans. So take a step back, re-evaluate, and formulate an action plan to improve your score.
Even if your score is really low, try not to get stuck in a rut of thinking about it as “bad credit” or that your situation is hopeless. It can be really hard to establish and maintain a strong credit history and a high credit score, and it’s notoriously challenging to navigate.
Your score also may not be your fault at all — you may just be too young, or, in extreme and unfortunate circumstances, you may be the victim of fraud. While that can be frustrating and time-consuming to resolve, you may see a dramatic improvement in your score fairly quickly once you address the issue. You can get free access to your credit report from annualcreditreport.com to get a full picture of where you’re at.
There are other ways you can take action for immediate student loan payment relief, too.
Consider a cosigner
If your score is too low to qualify, or if you’re seeking a lower interest rate, you may be able to enlist the help of a cosigner to access better interest rates. Generally, people ask their parents, guardians, or other family members first, though you may have other trusted individuals in your life who you can call upon.
You’ll want to have a thorough, serious conversation with whomever you ask — they’ll be asked to vouch for you throughout the loan term, and getting a cosigner release may require refinancing again later on with a new loan. It may be helpful for you to create a written contract between you and your cosigner outlining terms, like whether you’ll refinance on your own or request a cosigner release once you’ve reached a certain salary, or progressed to a certain period of time.
Consolidate your federal loans
If you don’t have a qualifying credit score for refinance companies, you still have options that may help you simplify your student loan payments. If you have federal loans from the Department of Education, for example, you can apply for student loan consolidation.
This bundles everything you wish to consolidate, including Parent Plus Loans if you have them, into one single monthly payment and loan balance with the same loan servicer. This can make it much easier to keep track of your total loan balance, and to make payments on time since there’s only one bill to pay.
The federal government doesn’t offer different rates based on credit scores — everyone gets the same rate. So it’s important to note that this option won’t really save you money over time. Your new interest rate will be calculated based on a weighted average of the interest rates of your current loans, so it’s possible you may end up paying slightly more interest over time this way.
However, consolidation means you’ll get to hang on to the protections6 the federal government offers to borrowers, including flexible repayment options. You also won’t lose access to forgiveness programs like Public Service Loan Forgiveness, which enables people in qualifying careers to cancel the remainder of their debt after meeting certain requirements.
Consider federal repayment assistance
If you’re refinancing because your monthly payments are too high, there may be other ways for you to get financial relief without refinancing. If you have federal loans only (private loans are not eligible for federal protections) you can try restructuring your repayment plan:
- Income-Based Repayment: These plans temporarily reduce the amount of money you’re required to pay monthly, taking your income into consideration. Your interest rate will stay the same and it will continue to accrue as usual.
- Forbearance: If your loans are in forbearance due to financial hardship, you won’t be required to make any payments during that period. It’s important to note that interest will continue to accrue.
- Deferment: You may be able to take advantage of a deferment period if you are actively enrolled in school or if you have a grace period — such as after graduation or at the beginning of a new loan. Interest will still accrue during this period unless you have an unsubsidized loan.
- Consolidation: You may be able to take advantage of a grace period after consolidating your loans. Consolidation may also grant you an extended repayment period so that your monthly payments will be lower.
Take steps to improve your credit score
Once you get a handle on what your credit score is, you can start taking steps to improve it. It can take time to build credit history and increase your score, so make sure you keep these tips in mind all the time to maintain that excellent credit once you’ve got it.
1. Figure out where you are starting
Check your credit report to get an idea of your current score, so you know how far you have to go. Everyone can get a free copy of their credit report each year from each of the three major credit bureaus: Equifax, Experian, and TransUnion.
If you see any errors, dispute them now to clean up your report before you apply again.
2. Pay every bill on time
Payment history makes up 35% of your FICO score, so this should be a priority if you want to make a change. Recent payment history is much more weighted than past payment history, so getting on track now can make a big impact on your score.
3. Stay below your credit limits
Credit utilization makes up 30% of your FICO score, making it the second most important factor. This is the amount of credit you use versus the amount available to you. Aim to keep this below 30% when making big swings at bringing your credit score up.
4. Don’t close old accounts
Length of credit history accounts for 15% of your score, and this can be an easy one. Just don’t close your oldest credit cards or accounts. This might go against the consolidation and financial housekeeping that you have been doing, but showing that you have a long credit history will have a positive impact on your score.
5. Add accounts to your credit history
You may be able to improve your credit score a few points almost instantaneously by manually adding accounts you pay monthly. For example, connecting your internet bill, phone bill, or even your Netflix or HBO account to Experian’s score boost program can improve your FICO score.
6. Open a new credit card
Under some circumstances, opening a new credit card may improve your credit score. However, it’s important to understand why and to review your credit report first to make sure it makes sense for you.
If your score is being dragged down by too many new accounts because your average age of credit history is too new, opening a new card will further exacerbate that problem. If your score is being dragged down by using too much of your available credit, increasing your limit with a new card could help. Similarly, if you don’t have any credit cards at all, you can start building your history by opening one, using less than 30% of your available credit, and making your payments on time and in full.
7. Piggyback on your partner’s perfect payment record
If you have a relative, partner, or guardian with a long credit history and perfect track record for making payments, you may be able to increase your score by having them add you to the account as an authorized user.
See how much you could save with Earnest
Whether you want to simplify your loan repayment process, find the best student loan for you, or capitalize on low interest rates to save money, improving your credit score can help you achieve your personal finance goals faster.
Try out Earnest’s rate calculator today to see where you’re starting from—and how much you could save if you refinanced today. It takes about two minutes to check your rate and figure out where you stand, and it won’t affect your credit score.
Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
1 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.
2 Loan Eligibility criteria: Your debt is from paying for education at a Title IV accredited school. The debt is from your education or your child’s. The debt you’re refinancing is for a completed degree or one that will be completed at the end of this semester. You are currently the primary borrower on the student loans you would like to refinance, and you will remain the primary borrower after refinancing. You must reside in the District of Columbia or one of the 48 states Earnest Operations LLC is authorized to lend in (all but Kentucky and Nevada). This is strictly a student loan refinance product. There is no opportunity to borrow more than your outstanding qualifying student loan amount. You must be the age of majority in your state or older at the time you apply, as well as be a United States citizen or Permanent Resident Alien without conditions. Refinancing is subject to credit qualifications. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX.
3 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 from a checking or savings account. 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.
4 Earnest’s 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 $50.07) and a 1.89% APR would result in a total estimated payment amount of $12,016.57. 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 $57.94) and a 3.49% APR would result in a total estimated payment amount of $13,906.70. Your actual repayment terms may vary. Includes 0.25% autopay discount.
5 Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.
6 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.
Earnest Loans are made by Earnest Operations LLC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit www.earnest.com/licenses for a full list of licensed states. For California residents: Loans will be arranged or made pursuant to a California Financing Law License.
Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.
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