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Will Refinancing Student Loans Hurt My Credit Score?

Does Refinancing Student Loans Hurt Your Credit?
Rebecca Safier
Rebecca SafierUpdated May 5, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Editor’s Note: Since the writing of this article, the Biden administration has extended the pause on federal student loan repayment through mid 2023. Refinancing student loans can slightly hurt your credit in the short term due to hard credit inquiries. However, refinancing can help your credit in the long run if it helps you make on-time payments or pay off your student debt faster.Refinancing student loans has the potential to save you money on your education debt. But before you apply, it’s important to understand how refinancing can affect your credit. If you compare offers by prequalifying with lenders before you apply, you can minimize the impact that taking out a new loan has on your credit score. 

What Is Refinancing? 

When you refinance your student loans, you exchange one or more of your existing student loans for a new one from a private lender, such as a bank, a credit union, or an online lender. Depending on factors such as your credit and income, you could qualify for a better interest rate and friendlier repayment terms than what you currently have. Lowering your interest rate can save you money over the life of your loan, especially if you have a large debt balance. Let’s say you owe $100,000 at a 10% rate. If you can lower that rate to 7%, you could save over $19,000 in interest charges over the course of 10 years. Along with lowering your interest rate, refinancing can also simplify your debt repayment by combining multiple loans into a single loan with one monthly payment. Plus, you can choose new repayment terms, which in turn will adjust your monthly student loan bills. Note that it’s possible to refinance federal student loans, but doing so means you’ll lose access to federal protections. Because your new, refinanced loan will be private, it will no longer be eligible for income-driven repayment plans, Public Service Loan Forgiveness, or other federal benefits. Make sure you’ve weighed the benefits of refinancing student loans with the potential downsides before you make changes to your student loans.

What Is a Hard Credit Inquiry? 

Refinancing student loans with bad credit can be challenging.Another potential downside of refinancing student loans is the temporary drop in your credit score that can come from a hard credit inquiry. Any time you apply for a new loan, the lender runs a hard credit inquiry to check your credit. This credit check is typically run through one of the three national credit bureaus: Equifax, Experian, or TransUnion. By running this hard credit inquiry, a lender gets a detailed look at your finances, including how much debt you owe and your history of payments. The credit score required to refinance will be part of the analysis.According to Experian, a hard credit inquiry can cause your score to drop by five points or fewer, though the impact will vary by consumer. It’s worth noting that fluctuations in your credit score are normal, and your score should bounce back within a few months. 

Does Refinancing Student Loans Hurt Credit? 

People seek refinancing for lower interest or extending student loan terms. Because refinancing involves applying for a new student loan, a lender will run a hard credit inquiry as part of the application process. As a result, you could see a temporary ding in your credit score. If you go through with refinancing your student loans, you’ll also see your old student loan accounts close. Since “length of credit history” makes up 15% of your FICO score, closing old accounts that are in good standing also has the potential to hurt your score. Will refinancing student loans hurt credit? As discussed, the impact will probably be fairly low, and you can build your credit back up by making on-time payments on your refinanced student loan. Plus, if refinancing your student loans helps you pay them back faster, your credit score could also improve as you get rid of your debt (“amounts owed” makes up 30% of a FICO score).

How to Help Ensure Refinancing Student Loans Does Not Hurt Your Credit 

If you’re concerned that refinancing student loans will hurt your credit, there are steps you can take to preserve your score.

Use Prequalification to Compare Offers 

Many lenders let you prequalify for student loan refinancing offers with a soft credit inquiry, which doesn’t impact your credit at all. Through prequalifying, you can shop around without hurting your credit. Note that prequalification is a handy way to compare loan offers, but it doesn’t guarantee a loan. You’ll still need to submit a full application and consent to a hard credit check to lock in a rate. 

Complete Your Rate Shopping Quickly 

Not every lender lets you prequalify online, so you might rack up a few hard credit inquiries while you’re shopping for a loan. In this case, try to keep your applications to a 14- to 45-day period. If you keep your loan shopping confined to a few weeks, your credit score will likely count multiple credit inquiries as a single inquiry. 

Keep on Paying Your Student Loans Until Your Student Loan Refinance Is Complete

Missing payments on your student loans can cause significant damage to your credit, so make sure to keep paying your old student loans until the refinancing process is complete. Even if your application has been approved, wait until your old accounts show a balance of $0 and your new refinanced loan is up and running before you stop making payments. 

Stay Current on Your Refinanced Student Loan

It’s important to make on-time payments on your new loan to maintain your credit and avoid default. Payment history is one of the most influential factors on your credit score; it makes up 35% of your FICO score. By making on-time payments on your refinanced student loan, you can boost your credit score and likely make up for any temporary damage caused by taking out a new loan.

Student Loan Refinancing Options With Lantern 

If you’re wondering if student loan refinancing is worth it, prequalifying for student loan refinancing offers will help you preserve your credit and find the best loan for you. Lantern by SoFi lets you compare loan offers from multiple lenders at once with a soft credit pull that won’t affect your credit score. Learn more about how Lantern can help you find and compare student loan refinance options.

Frequently Asked Questions

Do credit unions offer student loan refinance?
Are credit union student loan refinancing options better?
What is the best way to refinance student loans?
Photo credit: iStock/Edwin Tan
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About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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