Juggling multiple student loan payments can be challenging for many graduates. Today, most former students leave college with at least one student loan; on average the typical graduate in the United States carries $27,975 of debt upon crossing the threshold at commencement. The average student loan varies greatly from one state to another, with the average debt surpassing $25,000 in some North Eastern states.
A lot can change from the time a student receives a loan to the time they graduate. During college, many student loans come with in-school payment deferments, but once payments kick in many graduates are confronted with high monthly bills. On the flip side, some students find success with a well-paying job post-graduation. They’ve spent four years building up their credit score and now would qualify for much lower interest rates and better terms.
In both these situations, it might make sense to seek out student loan refinancing options. After taking some time to shop around, a refinanced student loan should have much better terms than the original loans. Depending on the circumstances, such loans might reduce your monthly payment with extended payment terms or lower interest rates.
If you’re toying with the idea of refinancing, it's important also to know how it may affect your credit score. Refinancing is supposed to improve your financial situation, not leave it in shambles. Find out what you need to know before you get started.
Refinancing Your Student Loans
The ultimate goal of refinancing student loan debt is to receive better interest rates, monthly payments, or repayment terms than before. Refinancing will look different for everyone, depending on financial history, the private lender offering the refinancing service, and current interest rates.
In essence, refinancing is combining your current loans into a new loan, perhaps from a new lender, under new terms. Reputable private lenders can put together a rate for you with only a few personal details such as name, contact information, student loan burden, income, and sometimes monthly housing expenses. To provide the initial rate, a lender should be able to do a soft credit pull to determine the rate.
Does Refinancing Student Loans Hurt Credit?
Refinancing can be a bit confusing at first. What are the short-term and long-term ramifications of getting your student loans refinanced? If it affects your credit score, doesn’t that have a long-term effect on your finances?
Hard Credit Inquiry
Although a private lender will typically use a soft credit check for the initial rate inquiry, a hard credit score pull is likely unnecessary at that time. When you finally settle on a new lender, they will then have to make a full credit inquiry. Hard credit score checks do leave a mark on your credit score, but as long as they are infrequent, it should not have a long-lasting effect. Usually, a credit check only takes a few points off.
Mixing Up Types of Credit
Up to 15 percent of your credit score is determined by what types of credit you hold. For example, having a variety of different types of credit can have a positive effect on your credit score. Having student loans, in conjunction with other types of debt, are usually considered ‘good debt,’ at least according to this particular measure.
Closing Out the Old Student Loans
The effect on your credit from closing out the old loans can be hard to determine in advance. Different credit scoring models can weigh closed loans differently. It comes down to how the model uses the payment history from the old loan versus the relatively new payment history from the new loan.
Some scoring models ignore the payment history for the closed loans altogether and only consider the payment history on open loans. Other models might incorporate the data from the closed accounts into the score but weigh it as less important compared to the payment history of the new loan.
The Benefits of Better Terms
Are you refinancing because you are struggling to make on-time payments to your student loan creditors? Refinancing can theoretically lead to better credit in the future because it makes it easier to make on-time payments. However, consider what it means to have your payment terms extended from 10 years to 20 years.
Checking Your Credit After a Student Loan Refinance
Keeping a close eye on your credit score under your new student loan agreement is essential in the months and years following the refinancing. Is your new lender making accurate reports to the credit bureau? Can you confirm that the old student loan was closed? Correcting errors promptly can help you avoid unnecessary headaches with your credit over time.