How does refinancing a student loan affect credit?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you’re considering refinancing a student loan, you need to have answers to all of your questions. For starters, does refinancing student loans affect credit? Fortunately, student loan refinancing doesn’t have to negatively affect your credit, but you need to know how to go about the process carefully and fully informed. Since refinancing comes with several benefits, it’s nice to know that you can consider this option without it killing your credit. 

What is a student loan refinance?

Student loans can come from two sources: federal funding and private funding. Federal student loans come with some benefits, such as subsidized interest while you’re in school and the potential to apply for a loan forgiveness program.

Unfortunately, you can’t refinance a federal student loan with the government. Refinancing is always done through a private lender. While going to a private lender may sound scary, refinancing can save you money. 

When you refinance, you take your student loan(s) to a lender and negotiate a better interest rate or a more manageable monthly payment. This can help you save thousands during the life of your loan, but how much money you save depends on a number of factors—such as fees for refinancing, the decrease in interest rate and the length of your new repayment term. 

Protect your credit during a student loan refinance

Credit inquiries and missed or late payments are the two factors that might impact your credit when you go through student loan refinancing. But if you’re careful, you can minimize the damage done to your score during a refinance.

Credit inquiries

When you initially approach a lender about refinancing, they’ll conduct a soft inquiry on your credit to see if you’re eligible. However, once you officially apply with a lender for a refinance, there will be a hard check on your credit. A hard inquiry can lower your credit score by a few points.

These few points are easy to recover if you continue to be responsible with your credit. But if you have multiple hard inquiries within a relatively short period of time, your credit score may drop significantly—potentially up to 10 points per credit inquiry. 

To avoid this situation, try to submit as few applications as possible. To be clear, that doesn’t mean you shouldn’t compare your options. It’s in your best interest to approach several lenders to see who can offer you the best terms and lowest interest rate. You can still shop around and compare lenders—just don’t fully apply with every lender.

Lenders should be able to give you a good idea of your options when they pull a soft inquiry on your credit. Let your lenders know you’re comparing rates so they’ll begin to offer you more competitive terms. 

In addition, most credit bureaus have a 14 to 45 day “shopping period.” If you have multiple hard inquiries within this time frame, a credit bureau may count it as only one inquiry. Whenever possible, try to keep your inquiries to this small window of time, ideally ranging between two and four weeks.

Payments

Your student loans are tied to your credit. Every time you miss or make a late payment, it negatively impacts your credit history and your credit score. If you’re considering refinancing, you must make all your payments on both your past loan and your refinanced loan until you’re absolutely certain the previous loan has ended. After you know the transfer is complete, you can make payments on the refinanced loan only. 

When should you refinance?

When it comes to refinancing a student loan, timing can be everything. For this process to be worth it, you need to have a decent credit score and a stable income. These two factors will ensure that when you go to lenders for refinancing, they’ll offer you a lower interest rate than the one you currently have. 

Two downsides of refinancing a student loan

Refinancing isn’t the best choice for everyone, and there are two main downsides you should know about. 

Your interest rate might not decrease by much

Student loan interest rates have remained relatively low in recent years. This means private lenders don’t have much leeway and may not be able to offer you an interest rate that’s much lower. 

That being said, even a small decrease in interest can make a significant difference over the lifetime of a loan. For example, let’s say you had a $30,000 student loan with a 10-year payment period. Your initial loan interest is five percent, and a refinancing lender offers to lower your interest to four percent. A one percent difference may not sound like a lot, but it’ll save you $1,736 in interest over 10 years. 

One thing to note is to take into account any fees for refinancing when comparing your loans. If your refinance lender is charging you a $200 sign-up fee, that will eat into your savings. 

You’ll lose access to benefits of federal funding

You can only refinance with a private lender, which opts you out of any benefits of federal funding. If you opt out of federal student loans, you lose access to federal repayment options such as the income-driven repayment plan. 

You also lose the ability to apply for federal loan forgiveness programs. Several federal loan forgiveness programs for candidates such as teachers, military service members and public servants may forgive a portion or all of a loan under specific conditions. These programs are often difficult to qualify for, but it may be worth sticking to it if you were already on this path. 

Who shouldn’t refinance

If you have poor credit or unstable income, you’ll likely be denied refinancing or get an interest rate that isn’t better than your current interest rate. If this is the case for you, focus on improving your credit score and reapply for refinancing later on. 

Additionally, people who are close to the end of their loan term typically won’t see any benefit from refinancing. If you’re almost done paying off your student loan, simply focus on getting to your end goal. 

Is refinancing the best option for you?

Ultimately, the decision to refinance should be made on a case-by-case basis. You need to weigh all the pros and cons of refinancing before making a decision.

A useful tool when evaluating refinancing is a loan calculator. These online calculators help you determine just how much you can save if you refinance a loan. Don’t forget to subtract any fees from your savings to depict your actual savings accurately. 

Your student loan will impact your credit for many years to come, and your credit has a long-reaching impact on other areas of your life. Whether you refinance or continue with your regular student loan, make sure you build responsible habits with your loan repayment. Sign up for auto-pay, make additional payments if you can and track your progress. 

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