How to Refinance Your Student Loans - 5 Step Guide
If you’ve felt the heavy weight of repaying your student loan debt, there might be good news. You may be familiar with the process of refinancing home loans, but did you know that you can apply the same process to college debt? In this post, we’ll shine a spotlight on how to refinance student loans.
Whether you’ve been out of college for a short period of time, or graduated decades ago, this information could help you navigate your way out of debt and into freedom. Keep reading to uncover crucial information such as:
- Why you’d consider refinancing student loans in the first place
- What the student loan refinance process looks like
- How you can benefit from a refinance process
- How to apply and secure refinancing in a few simple steps
- Special conditions that could affect your eligibility
Why Refinance Your Student Loans?
Perhaps the thought of refinancing your student loans sounds too good to be true. If that’s the case (and you’ve been struggling under the weight of student debt), keep reading. There are plenty of reasons why you’d want to explore refinancing.
The whole purpose of refinancing your student loans is to consolidate your debt under a common, lower interest rate. This means that you’ll pay less money throughout the life of the loan. If you look closely at your payments and notice that the bulk of each payment is going toward interest, refinancing could reduce this extra burden.
Refinancing is generally beneficial when you have:
- Multiple student loans under different lenders with varying interest rates
- A fixed (rather than a variable) interest rate that does not fluctuate over time
- A strong credit score and financial stability that allows you to make consistent payments
- A pressing need to free up cash resources for other monthly bills or expenses
Occasionally, these scenarios may overlap and take place at the same time. If that’s the case, begin your refinancing journey by entering your numbers into a student loan refinancing calculator. You can find great options for this though companies like LendKey and Earnest.
Is refinancing ever the wrong idea?
Refinancing can be beneficial to many different individuals, no matter their income level, educational background, or financial standing. That being said, there are a few times when you may not wish to refinance. This is the case if:
- You’re more interested in exploring repayment options through federal programs
- You’re eligible for student loan forgiveness through a specific federal option
- Your interest rate doesn’t look like it will change drastically
- You are near the end of your loan repayment cycle and have minimal balances left
If any of these scenarios apply, be sure to research and consult a financial advisor who may be able to help you weigh the costs and benefits more accurately.
How Does Student Loan Refinancing Work?
According to LendKey, student loan refinancing “gives some influence back to borrowers.” At the time a loan is initiated, key terms are set in place; this includes important factors like interest rate. However, refinancing offers the possibility of adapting those terms as time and circumstances change.
The refinancing process begins with an application to a new lender. Through this initial application, borrowers will need to provide information about their loan balances, interest rates, income sources, and other personal details.
Throughout the refinancing process, there are several options to increase flexibility, including:
- Lowering interest rates
- Consolidating debts into a single loan
- Removing a cosigner of the original loan
Benefits of Student Loan Refinancing
If you’ve been struggling to keep up with multiple monthly loan payments and staggering interest rates, refinancing your student loans could provide an enormous opportunity. Benefits of refinancing include:
- A reduction in the number of monthly loan payments you make each month
- An overall lower interest rate from one lender (as compared to several)
- The ability to refinance multiple times with private lenders
- Flexible repayment options and even unemployment protections
Generally, refinancing is about creating more options. While this process doesn’t eliminate your debt, it could very well make it easier and more realistic to manage for years to come.
5 Steps to Refinancing Your Student Loans
While the process for refinancing your student loans varies by personal situation and lender of choice, the steps involved can actually be quite simple. In this section, we’ll break down the five top moves you need to make to refinance your student loans with ease.
Step 1: Have an accurate picture of your current situation and what you hope to gain from refinancing.
Experts point to a number of questions that borrowers should consider before deciding to refinance. These personal and financial questions include:
- What do I hope to gain by going through this process?
- What can I reasonably afford to pay in one payment each month?
- What is my goal interest rate, and what rate would make this more expensive?
- Do I need any outside help (in the form of a cosigner) to secure a new loan?
The answers to these questions will help establish a realistic picture of your current financial situation. Additionally, they’ll help you know what to shop for as you compare competing companies and interest rates.
Refinancing is a big decision, and many individuals pursue it as a means to aggressively pay off loan balances faster. Whatever your personal situation is, set specific goals that help you think more critically about how to refinance student loans.
Step 2: Learn more about what you actually qualify for with calculators and financial planning tools.
Some of the prep work that takes place before refinancing involves plain and simple math. If you’re not a loan interest guru, don’t fret. There are several automatic calculators and tools online to help you get an accurate picture.
Refinance calculators–like those from LendKey and Earnest–can help you juggle multiple loans. Often, separate loans balances have different amounts and interest rates. This makes it hard to visualize how packaging them together changes your financial picture.
You’ll also want to know what you qualify for. Occasionally, lenders offer a pre-application process, which is similar to a mortgage pre-approval. By using information like your income, rent, and credit score, pre-applications can shed light on which interest rates are realistic.
Step 3: Apply what you’ve learned and use that knowledge to shop around.
Refinancing offers the immediate appeal of a lower interest rate. As a borrower, you might be likely to jump on the lowest rate you see. But it’s important to take your time and do diligent research.
Experts from Lending Tree point out that a lender’s trustworthiness could be just as important as the rate they’re able to offer. How comfortable do you feel talking to a lender about your personal situation? Are you able to receive sound advice and financial help?
When comparing lenders, you should also be aware of hidden costs and fees that may add up over time. Lenders sometimes charge for things like applications, origination, and repayment. Select a lender that’s transparent about these costs and can share any helpful benefits or savings opportunities.
Need a place to begin your search? Here’s a list of some of our top refinancing partners to work with:
- Earnest - Earnest has helped over 105,000 students refinance $8.6 billion worth of student loans. Will you be one of them?
- Laurel Road - Laurel Road offers easy refinancing without the added burden of associated costs and fees.
- CommonBond - CommonBond is a lender on a mission; the company’s focus on social ethics and philanthropy shows an emphasis on community service.
- Credible - Credible is known for taking the confusing lingo out the financial process. The company’s transparency lets borrowers weigh options without hassle.
- Figure - Figure offers a fully paperless application process that can be taken care of in as little as five minutes.
- College Ave - College Ave helps plenty of satisfied customers reduce monthly loan payment stress with step-by-step help and flexible terms.
- LendKey - LendKey offers a variety of refinancing options for several loan types and has a comprehensive knowledge base for learning about the financial process.
Step 4: Select your lender and begin the application process.
As you do your research, be sure to collect offers from different lenders along the way. There are a few critical components to look for in any refinancing offer.
- Total loan amount (consider this the sum of all loans you’re consolidating)
- Repayment term (how many years you will have to repay the full sum)
- Interest rate (check to see if this is variable or fixed)
- Monthly payment (may be given in a range or in a required minimum)
The next, and most obvious step, is to select your loan offer and apply. A formal application will likely include an array of personal information and questions about financial history. Lenders may also ask you to provide proof of citizenship, driver’s license or passport, pay stubs, official loan statements, and information about a cosigner.
Since every lender has a unique process for accepting qualified candidates, don’t give up if your first application isn’t approved. Move to a new preferred lender, follow the application process, and wait for results.
Step 5: Wait for approval while making continuous loan payments.
As you wait for any application’s approval, it’s crucial that you continue to stay up-to-date on all of your student loan payments and other bills. Since lenders often run a credit check, missed payments can greatly affect your chances of getting approved.
Depending on the lender, an approval may take anywhere from a few days to up to a month. Use that time to keep tabs on your loan status and to stay on top of your other financial obligations. Once you receive approval, the process will likely be quick!
Special Conditions for Refinancing
Refinancing your student loans is not a one-size-fits-all process. In fact, there are many nuances and special circumstances that could change the outcome of your efforts to refinance. These factors include whether your loans are private or federal, your financial status, and your income.
Below, we break down what you need to know to tackle each of these unique situations.
Private student loans
According to U.S. News data from 2018, only about 3% of borrowers have attempted to refinance private student loans. This number stands in contrast to federal loan refinancing attempts, which averaged about 22% that same year.
If a student takes out private student loans during college, these loans often carry higher interest rates than federal options. When it comes time to make payments, these steep rates add up. To consolidate private student loans, you must carry no more than $150,000 in existing student debt.
Refinancing with low income
Sometimes, income plays a big part in your ability to repay student loans. If you can only make the minimum payment amount each month, your repayment window is drastically longer.
Some lenders may look at debt to income ratio more closely and make decisions based on your perceived ability to repay. If this is a factor for you, seek out lenders and refinancing companies that are willing to work with low-income borrowers. Since you can refinance multiple times, you may choose to apply again when and if your income increases.
Federal student loans
If you’re interested in refinancing your federal student loans, you’ll begin the process through a government program called the Federal Direct Loan Consolidation Program. This program allows you to combine multiple federal loans into one. In doing so, you’ll make one monthly federal loan payment instead of several.
Many borrowers wish to streamline these loans in order to consolidate payments. Additionally, variable rate loans can be changed to fixed rate loans.
Occasionally, refinancing your federal loans comes with costs to consider. These include forfeiting loan forgiveness and negating deferment and forbearance options. If you’re in a position to lose any federal benefits by refinancing, you may choose to wait or consider alternatives.
Refinancing with bad credit
With refinancing, it’s important to remember that you’re essentially applying for a new loan. And any time you submit a loan application, your credit score factors into the equation. While having low credit doesn’t eliminate your refinancing options, it may narrow the playing field.
If you have a credit score below 600, research refinancing companies that have low requirements. It’s also important to mention that the act of refinancing won’t automatically improve your credit score. You should commit to making payments, reducing overall debt, and maintaining a strict monthly budget.
Working with a Student Loan Refinancing Company
According to the College Investor, student loan refinancing has been a growing trend in recent years. Fortunately, this means that borrowers likely have more flexible options than ever before. More lenders are rising to meet the needs of individuals with student loan debt in ways that are beneficial and productive.
Looking for a place to start? Compare a few of our top picks for refinancing your student loans.
- Laurel Road
- College Ave
Tips for Tackling Your Student Loans
While it may sound surprising, how to refinance student loans begins long before you start any new application! How so? Financial preparation should be taking place in the background before any major refinancing change.
You can start preparing for the refinance process far ahead of time by making smart financial decisions. In fact, one financial consultant considers these steps to be the real secret of successful refinancing. You can help ensure a smoother refinancing process at a later point with a few financial strategies.
- Maintaining or improving your credit score. As this is your responsibility, you’ll want to monitor your credit and cut down on risky activities. Many lenders look for scores in the high 600s, which gives you a range to shoot for.
- Making regular, on-time loan payments. When it comes to refinancing, history matters. How responsible are you with your current loan payments? Even if you can’t max out on payments, are you timely with the minimum payment amounts?
- Holding a stable job with recurring income. Sure, you might appreciate the flexibility of independent work or odd jobs here and there. But if you’re looking to consolidate debt, most lenders will look for stable employment and income levels. It’s usually a good idea to have consistent employment around the time of any major financial application or change.
- Find a potential cosigner, when relevant. Perhaps you’re on your feet financially, but you’re not completely where you’d like to be. In this scenario, having a cosigner can support your refinancing efforts. Make sure that the person is comfortable and willing to act in this role before you add their name to any financial or legal document.
Did you know that The Credit Review is committed to helping readers tackle their debts through practical and manageable steps? In our latest content, you can quickly access relevant articles and helpful advice for managing your student loans.
You won’t want to miss some of our favorite resources about student loan refinancing!
- Student Loan Deferment vs. Forbearance (And How They Affect Your Credit)
- The Comprehensive Guide to Loan Refinancing
- Why You May Need Student Loan Refinancing
Frequently Asked Questions
Is it worth it to refinance student loans?
Whether it’s worth it to refinance your student loans depends on your unique situation. If you have decent credit, a reliable job, and multiple student loans, then it may be worth it to refinance your loans. If, however, you find yourself in an unstable financial situation and/or are relying on government programs for support, you might want to wait until you have more financial security before you refinance your loans.
What is the best student loan refinancing company?
Again, the “best” student loan refinancing company is relative to your unique needs. Each company will have different requirements and benefits. At The Credit Review, we recommend these student loan refinancing companies for most students: Earnest, Laurel Road, CommonBond, Credible, Figure, College Ave, and LendKey.
What is the downside to refinancing student loans?
There are some downsides to refinancing your student loans. These include (but are not limited to) having to meet strict eligibility requirements, getting locked into a set repayment plan, and limited flexibility when it comes to deferment or forbearance options compared to federal programs.
How can I refinance my student loans with low income?
If you have a low income and want to refinance your student loans, your best bet is to improve your credit score to meet eligibility requirements, pay off as much debt as possible, increase your income, and/or get a qualified co-signer.
What credit score do I need to refinance student loans?
To refinance your student loans, you (or your co-signer) typically need to have a credit score of at least 600 in order to qualify. Most student loan refinancing companies’ minimum credit score requirements fall somewhere between 650-680.
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