If you're juggling multiple student loans, you might want to consider refinancing them to consolidate your payments in one place.
But before you decide to consolidate your loans or apply to refinance, it’s important to understand how the process works. Plus, if you have federal student loans, it may be a bad idea to refinance with a private lender.
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- Before your refinance student loan debt, you need to calculate the total cost of refinancing to make sure it’s worth it.
- If you have federal student loans, it’s almost never a good idea to refinance, as you lose access to many borrower benefits, including student loan forgiveness.
- Most lenders require a good credit score and decent income to qualify for the best rates.
- You can get prequalified online in just a few minutes with most student loan refinance companies to compare rates before completing an application.
1. Know Your Situation Before Refinancing
Before you choose to refinance your student loans, there are a few things you need to consider:
If you have federal loans
You may want to avoid refinancing federal student loans. This is because federal loans offer unique benefits, including student loan forgiveness, deferment options, and income-based repayment plans. And they typically have some of the lowest interest rates available.
Instead of refinancing federal loans, you can consider doing a Direct Consolidation Loan, which combines your federal loans into a single payment.
This allows you to still qualify for loan forgiveness and income-based repayment options without refinancing through a private lender.
Calculate the costs
While student loan refinancing can potentially lower your monthly payments, it’s important to calculate the total costs.
In addition to the interest rate, there may be other fees, such as an origination fee and possible prepayment penalties.
Calculate your current interest rate for each of your student loans and understand the total cost you will pay on your current repayment schedule. Then, calculate your student loan refinance to see if you will really be saving money in the long run.
For example, say you have multiple student loans at an 8% APR with seven years left in repayment, and you're considering a refinance to get a lower interest rate of 7% APR on a 10-year loan.
This reduced interest rate can lower your monthly payments. However, because you extend the loan term by three additional years, you may end up paying more in the long run.
And if the new loan has an origination fee, this can add to your total refinancing costs.
There are some great student loan calculators out there to help you see if you’ll save money. This student loan refinancing calculator makes the calculation simple (assuming you qualify for the lowest interest rate).
READ MORE: How To Consolidate Student Loans
2. Make Sure You Qualify for Refinancing
While federal loans don’t require a credit check or income verification, a private student loan is more similar to a mortgage application. It requires a good credit score and income to qualify for the best interest rate.
Many student loan refinancing companies offer a prequalification tool to check if you qualify, but others may require a full application.
Some lenders will list their minimum credit score requirements on their website.
Improve your credit score
If you find that your credit score isn’t quite high enough to apply or you don’t qualify for the best interest rate, here are a few steps you can take to improve your score:
- Review your credit report: You can download a free copy of your credit report from all three major credit bureaus at annualcreditreport.com. Review them for any negative marks, then work on getting those removed.
- Stay up-to-date on your bills: On-time payments are one of the most important factors that make up your credit score. Staying caught up on your bills and debt payments is crucial to improving your score.
- Pay down debt balances: If you have maxed out credit cards or high debt balances, this can have a big impact on your credit. Paying down debts lowers your credit utilization and debt-to-income ratio, and can improve your score.
- Use a co-signer: If you don’t want to wait until your score is improved to apply for a refinance, consider using a co-signer. You can use their score and credit history to get approved, and potentially get better interest rates.
READ MORE: How To Increase Your Credit Score the Right Way
3. Compare Multiple Lenders
Collect quotes from different lenders and compare their loan terms and what interest rates you may qualify for. Additionally, you can choose between fixed-rate and variable-rate loans.
You may opt to apply for multiple lenders on your own or use a site like Credible student loans to review options for multiple loans with a single application.
Pay attention to the loan policies for each lender, including the maximum loan amounts, fees, and if there are any prepayment penalties for paying off your existing private student loans early.
And make sure to understand the co-signer rules and release policies before applying with a co-signer.
4. Get Prequalified for a Student Loan Refinance
Many online lenders offer a prequalification tool that allows you to submit a quick application in just minutes and review potential loans and rates.
To get prequalified, you only need to enter basic personal information, along with some general financial information.
With a prequalification application, lenders only do a soft inquiry on your credit, which will not affect your credit score.
After submitting your prequalification application, you’ll be able to view your loan options to find the interest rate and loan term length that's best for you.
Once you choose your loan, you will need to complete a full student loan application, which may require more documentation and result in a hard inquiry on your credit.
5. Complete Your Application
To complete your student loan refinance application, you’ll need to complete a full loan application. In addition to a credit check, you’ll need to provide the following information:
- Personal information (name, address, email, etc.)
- Financial information (income, debt balances, etc.)
- Social Security number (or other identification documentation)
- Other required information from the lender
You’ll also need to provide documentation to verify your existing student loan debt and other financial information, including:
- Current loan statements
- Proof of graduation (or residency, if a medical student)
- Proof of employment
- Government-issued photo ID (such as a driver’s license)
- Bank statements
- Pay stubs
You may need to provide more information, depending on your refinance lender and financial situation.
Once you complete your application, you will be required to sign your loan documents to accept the loan terms. Once your loan is accepted, your lender will then pay off your old loans through a disbursement. This may take several days or weeks.
6. Keep Making Payments
Continue your student loan repayment on your old loans while your student loan refinance is processed. Missing a payment during the refinance process can lead to penalties and negatively impact your credit score.
Once you receive confirmation that your old loans are paid off, you can stop making monthly payments on them. You will need to switch any autopay services you have set up for your old loans and start making payments on your new loan.
FAQs
Should I refinance my student loans?
Refinancing your student loans is best for borrowers who already have private loans with a high interest rate. It can save them money by lowering the rate and potentially the monthly payment.
However, refinancing federal loans is usually not a good idea. Refinancing a federal student loan into a private loan usually means you’ll lose your borrower protections and access to student loan forgiveness options.
How often can you refinance student loans?
Refinancing private student loans is possible if you qualify, but frequent refinancing may incur origination fees, potentially increasing overall costs.
Plus, most lenders only let you refinance student loans directly with them once. This means you’ll have to find another lender to refinance with if you want to refinance again.
Does refinancing student loans make them private?
Yes, when you refinance federal student loans, you are moving to a private lender. This loses your federal student loan borrower protections and may end up costing you more in the long run.
What credit score do you need to refinance student loans?
Most private lenders require a “Good” or “Excellent” credit score, but some accept applications from borrowers with “Fair” credit.
Good credit scores are 700 or above, depending on the credit reporting agency. Fair credit scores range from 580 to about 670.
Note that lenders that accept lower credit scores often charge a much higher interest rate.
What are alternatives to student loan refinancing?
If you don’t want to refinance your student loans with a lender, you can pay off your loans in other ways.
One alternative to student loan refinancing is using a home equity line of credit (HELOC) to borrow against the equity in your house.
If you have federal student loans, you can apply for a Direct Consolidation Loan. They still offer federal loan borrower protections and consolidate all of your federal student loans into a single payment.
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