How to Refinance Student Loans
Education is one of the most important things people have the privilege of having. Unfortunately, it’s not always too easy to afford; this is especially true for a big chunk of people who want to pursue education beyond high school but do not necessarily have the means. Fortunately, student loan refinancing is a way for students to pay off their loans on time.
For those new to this idea, the first question to pop into their mind is asking how to refinance student loans. The process of doing so involves student loan lenders buying out your loan from your current servicer. Basically, you will have a new loan as they already paid off your original one; your new one is now at a potentially lower interest rate and gives you the time to pay it off more conveniently. In addition, if you have several loans, these are refinanced into one easy payment instead of several ones which you may have the potential of skipping or even forgetting.
Can You Refinance Student Loans?
If you want to refinance your student loans, but you are afraid or unsure if you will receive approval, fret not! Student loan refinancing has the potential of saving you an average of $20,000 in your overall total student loans. For some cases, such as those who have a student loan from a health-related degree such as dental, medical, pharmacy, or veterinary school, you may even receive higher savings.
Consolidation vs. Refinancing
There is a difference between consolidation and refinancing. The former is a process where multiple loans are combined into a single loan, while the latter is the process of finding and using a more advantageous loan that will repay an older loan.
The Student Loans Refinance and Approval Process
While loan approvals are different for each lender, they do have many things in common, especially when it comes to requirements:
1. First, you have to prove you can afford your new payments. For example, you can show proof of a stable job with a good income that can cover your student loan
2. Second, you have to demonstrate that you are a responsible borrower. Find and show proof that you make payments on time, such as using a good FICO® score, or a record of good payments (some lenders have a minimum number of on-time payments required, while others will want you to show you have no missed payments at all).
Remember, each person’s situation is unique. While getting a student loan refinance approval is not always assured, there are ways to help increase your chances. If you get a rejection letter, do not be frustrated, as you can reapply once your finances and current situation changes positively.
Here are some insider tips to make your application as good as it can get:
1. Credit Score
The best way to get approval is by having a good credit score. Generally, lenders expect a minimum score of mid to high 600s. However, there are others that do not require a minimum at all. Ideally, your score should be 700 or higher.
What this does is it shows lenders a way for them to evaluate how you are with your financial obligations, including checking if you have a good history of making payments on time. As such, the higher your credit score, the better your chances of getting approved.
Private student loan refinance lenders need an assurance that you have enough money to repay your student loans, not just at present but during the duration of your loan. They want and need proof you have a stable, recurring cash flow.
Whether or not you have debt, you should be aware of your monthly income after tax. As such, examine your pay stubs, and cross check them with your proposed student loan payments as well as other living expenses (food, rent, transportation, and the like). If it checks out, then go for it!
However, if you do not have enough income, you can still up your chances for approval if you have a cosigner that’s both qualified and has a good credit profile. If you go this path, though, make sure to still pay things on time so you will not jeopardize their financial standing.
3. Other Debts
It’s not uncommon to have other debt, including credit card, mortgage, or auto debt. However, remember that these can influence your standing as well. Your existing debt is what lenders often base on, as part of the underwriting process. A tip is to try and repay all your other debt obligations, preferably in full, before applying to refinance your student loans.
4. Ratio of Debt vs. Income
Student loan lenders focus on your debt-to-income ratio. This means the comparison of your total monthly income in comparison to your monthly debt obligations. The lower your debt-to-income ratio, the better it is for you. Improve it by either increasing your income, decreasing your debt, or both.
To easier understand this ratio of debt versus income, let’s set an example. Hypothetically, you earn $10,000 a month, but you have $3,000 debt expenses a month as well. In this example, your debt-to-income ratio is 30%.
Speaking of income, one of the main sources you may have is your employment. When applying for refinancing student loans, you need to either be employed or at least have a written job offer, which guarantees your ability to pay off your new refinanced student loan.
In some cases, some private student loan lenders will allow you to refinance your student loans while you’re still in school or residency. However, most others will require work experience.
If you are unemployed (or underemployed), it’s difficult to receive approval for student loan refinancing. However, you can try still to do so with the help of a trusted co-signer.
Rejected for Student Loan Refinance? Here’s How to Improve Your Chances
Not receiving approval is nothing to be ashamed of. However, if you do get rejected for your student loan refinance application, there are things you can do to improve your chances.
1. Apply to More Than Just One Lender
Applying to multiple lenders is okay. In fact, there is no limit to the number of lenders you can apply to when you want to refinance your student loans. By applying to several lenders, you increase and even maximize your chances in getting approved. What’s more, if you apply to multiple lenders in a 30-day span, it is usually treated as a single inquiry on your credit report.
2. Check Your Credit Report
Speaking of credit reports, make sure you reviewed yours to check for any errors. If there are any, even if it’s just one, make sure to dispute them.
You can get a copy of your credit report from the three bureaus, namely Equifax, Experian, and Transunion, once a year and all for free.
3. Consolidate Your Debt
If you have outstanding debt, consider consolidating them into a lower interest rate loan. If in case your outstanding debt is for credit cards, consider debt consolidation with a personal loan – this significantly lowers your interest rate.
4. Pay Off Your Debts
As mentioned previously, you have a debt-to-income ratio. It is measured based on your debt in comparison to your income. If you lower your debt, increase your income, or do both, then you will get a better ratio. Find ways to cut expenses and manage your monthly finances, and then use the savings in making extra debt payments to more quickly pay off any other debt you may still have. However, be wary of income repayment plans as these can increase your interest payments over time.
5. Increase Your Income
Again, the debt-to-income ratio comes to play. It is essentially the reverse idea of the previous, but combining them will work best.
You can raise your income in several ways. You may ask for a raise, negotiate a bonus, or even look for a second job or side hustle such as doing freelance work, driving for ride sharing apps, and others.
6. Get a Trusted, Qualified Co-Signer
A co-signer is someone with good credit score who can help you get a better rate for your student loans, or help you get a loan you otherwise would not qualify for. You can ask your parent, spouse, or whomever that is close to you. They need to have a strong credit profile, and should be okay with being equally responsible for your student loan.
These days, it is not as burdensome to be a co-signer, as many student loan lenders offer what is called a co-signer release. This means your co-signer is relieved of their financial responsibility when they meet certain qualifications.
The Student Loan Refinancing Checklist
Before signing up for a new and private lender, experts advise that you need to understand your goals and reasons for refinancing in the first place. Here are three questions you need to ask yourself before diving into a new responsibility:
Why Am I Refinancing? You may have a number of reasons, including looking for lower interest rates, simplifying the repayment process, combining multiple loans into a single debt, and many others. Some would even refinance because they want a different customer experience than the one they have right now. Others could be looking into removing their co-signer from a private loan. There will be others who have a federal loan and want to refinance it into a private debt. Whatever the reason may be, think hard and find out what it is.
What Are the Pros (and Cons) of Each Lender? Looking into a lender’s strengths, and even their weaknesses, can make or break your financial standing. Remember that each lender will have their own sales pitch, so you have to be smart when looking around. Be it a financial bigwig or an investor-backed startup, each has their own positive and negative features. Take some time to research these, and research them well.
What Rate Can I Get? At the end of the day, it often will just boil down to what rate you’re eligible for. Regardless of their funding model, history, or employment assistance perks, many lenders usually offer similar services. However, you should check the interest rates and compare them. It is not an easy task, as these rates vary – usually a shorter term means you get a lower rate; in addition, your credit usually plays a role as well. Of course, your financial health and current credit score will affect the rates you’ll receive as well.
Federal vs. Private Student Loan Refinancing
Federal and private loan consolidation and refinancing have their own sets of pros and cons – every person has an option that will work for them, but not necessarily for other people. To find out which type is better for you, take a look at these lists of benefits and drawbacks:
Federal Student Loan Consolidation
You should consider a federal consolidation loan if you:
- Have federal loans with variable interest rates, typically from 2005 and earlier
- Want to combine a large number of federal loans into one easier payment
- Need to lower your monthly payments, and are fine with paying more over the loan’s lifetime
- Have federal loans that do not qualify for income-driven repayment
Here are some great benefits of federal consolidation:
- It is free – There are no other costs to consider such as origination fees and the like.
- No credit check, no co-signer – Borrowers whose credit is not that great need not worry about a credit check or even finding a co-signer in the event they have a not-so-stellar credit score preventing them from consolidating.
- Smaller monthly payments – Sometimes, Federal Direct Consolidation Loans may get you a lower overall payment, especially when they are repaid on an income-driven repayment plan wherein your monthly payment is based on your income. As consolidation loans usually mean having longer repayment terms, you may get smaller monthly payments.
- Deferment and forbearance – People who experience challenges like losing a job or having a serious illness have options available to them, letting them pause payments for a time without entering default.
- Federal Student Loan Forgiveness – Direct consolidation loans can qualify for loan forgiveness or cancellation if you meet certain criteria.
Inversely, there are also some drawbacks to federal student loan consolidation:
- Will not save you money in the long run and may cost more – A Federal Direct Consolidation Loan has an interest rate that’s based on the weighted average of your old loans; as such, no money is saved – your interest rate is rounded up to the nearest eighth of a percent which means your new loan may even have a slightly higher cost in total. In addition, the longer term also contributes to a higher overall amount.
- Lost loan forgiveness progress – Loan forgiveness means borrowers need to make a certain number of qualifying payments on the loan, all while meeting certain conditions. As consolidation means creating a brand new loan, you lose your old progress towards student loan forgiveness.
- Cannot prioritize high-interest loans – If you have a lower interest loan such as an undergraduate loan and a higher interest loan such as a graduate loan, putting them together via consolidation will make it impossible to prioritize paying off the higher interest loan first.
- You may default, and it has serious consequences – Unlike private lenders, the government can increase the wages or even use tax refunds to repay student loans which have entered default.
Private Student Loan Refinancing
You should consider a private consolidation loan if you:
- Want to combine both federal and private loans – private consolidation loans may consolidate any of the following:
- only private loans
- only federal loans
- a combination of both federal and private loans
Private student loan refinancing and consolidation has three main advantages:
- Lower interest rates – Private consolidation is your only way to refinance both federal and private loans, along with the potential of getting a lower interest rate. This method can result in lower monthly payments, thus leading you to getting and more savings over time.
- Can release a co-signer – As previously mentioned, some lenders these days are now willing to consolidate old loans that were co-signed into a new loan that now does not have the co-signer, thus releasing them of their duty.
- Longer repayment terms – In some cases, private lenders may allow for the repayment term on a consolidation loan to be extended beyond that of the old loans. This method saves your money on the monthly payment; however, just like in a similar case in federal loan consolidation, this method will increase the overall cost of your loan.
Inversely, there are also some disadvantages to private student loan refinancing:
- Strict requirements – The total opposite of federal loans when it comes to eligibility, as people who want to qualify for a private student loan refinance will need to have a credit check. Only those people who have an above average FICO credit score or better will typically be eligible. If your credit isn’t great, you may be required to find a co-signer. In addition, requirements like degree completion or annual income thresholds may also apply.
- Inconsistent rates – While rates for federal consolidation loans can be determined ahead of time, this is different for private lenders. Borrowers must shop around for rates from various private lenders, all of which evaluate borrowers in somewhat different terms. This is the reason finding the right private student loan refinance company can be burdensome. However, the evaluation is based mainly on your creditworthiness and a few economic factors.
- Fees – Some lenders will charge origination fees (although it’s usually low, somwhere in the range of 1% or 2%). While these don’t usually have to be paid upfront, they can be added to your loan balance, which may result in additional interest being charged to you.
- Limited loan terms – Private loan refinancing often have limited loan terms which tend to be significantly shorter than those of federal consolidation loans. Federal consolidation loans range from 10 to 30 years, while private consolidation loans often range from only 5 to 20 years.
- Few fringe benefits – In comparison to the benefits federal consolidation loans may offer, private consolidation loans do not really offer much help for borrowers who are experiencing hardship, or even those who are requesting loan forgiveness. For example, forbearance isn’t always granted when a person lost his or her job, unlike in federal loan consolidation wherein it’s almost always automatic. In addition, borrowers consider that fringe benefits like interest reduction after a certain period of on-time payments from current private loans will be lost.
Where to Get Your Student Loan Refinance
When you want to refinance your student loan, there are many private lenders available. This includes your local bank or your credit union.
There are famous names like Earnest and SoFi, both of which have low rates and a number of good benefits, flexible terms lower interest rates, and other perks, including taking a more modern approach to student loan refinancing. For example, Earnest approves individuals for student loan refinancing by checking both personal and financial situations instead of just the usual factors like your credit score and income.
There are other private lenders that have physical locations and branches, such as Citizen’s Bank and LendKey. Citizen’s Bank offers zero fees, competitive interest rates, and APR discounts. They have over 1,100 locations scattered all over the country. LendKey is another good option as they offer low-interest student refinance loans which are funded by local community leaders.
Refinancing private student loans is great and can benefit you financially when done right. Compared to federal loan consolidation, your private refinanced student loan can help you save money in the long run. It will get you a lower interest rate and lower monthly rate, which can help you keep up with payments and stay afloat financially when monthly payments are starting to become a burden. If you have federal student loans, make sure to look into repayment and forgiveness plans you qualify for before considering refinancing.