Student Loan Refinancing
What Is Student Loan Refinancing Relief?
Student loan refinancing relief allows qualified borrowers to reduce the interest rate and repayment terms on the new loan, saving thousands in total interest over the term of the loan. Student loan refinancing permits you to make monthly payments that pay off your loans faster, lock in a fixed interest rate, or remove a parent as the cosigner of a student loan.
Student loan refinancing relief is exclusively available from private lenders. Unlike other types of unsecured debt refinancing, student loan refinancing has virtually no cost to you (other then your time and paperwork) to convert your existing student loan. There is virtually no reason to not consider refinancing your private student loans.
When To Refinance?
You should refinance your student loans if:
You Would Save Money – There is no reason to refinance your student loans unless you end up paying less in interest.
You Can Qualify – You (or with a co-signer) generally need a credit score at least in the high 600s and enough income to consistently pay your debts and other expenses.
Your Finances Are Stable – If you have federal student loans and choose to refinance, your federal loans will no longer be eligible for Income-Driven Repayment and loan forgiveness. You need to ensure you will be able to consistently make your new student loan payment without this federal student loan relief option.
How To Refinance A Student Loan
When you refinance your student loan you take out a new loan at a lower interest rate. The lender will then use the funds to pay off the original loan (or loans) being refinanced leaving you with one single loan payment. If you are paying off multiple student loans, this is a process called debt consolidation.
Normally you cannot include any other kind of unsecured debt, such as credit cards or personal loans, in your consolidated student loan.
The process to refinance student loans is similar to like that of refinancing other types of debt:
- Identify which student loans you need to refinance. Note that if you include federal student loans, you will lose the option of federal student debt forgiveness.
- Determine the total amount of student loan debt to be refinanced as well as the APR rate per loan. If there are multiple student loans, you will need to calculate the weighted APR.
- Research multple student loan vendors and get multiple rate estimates.
- Choose a lender and loan terms. The quoted APR MUST be less than your existing student loan APR.
- Complete the lender student loan application which includes your approval of a hard credit check.
- If your student loan application is approved (school, degree, credit score, Debt-to-Income ratio, etc.), work with the lender to specify the specific loan terms and monthly payment amount you desire.
- Sign the final student loan lender documents.
- Wait for the lender notice of having disbursed pay offs to your existing loans. (You should continue paying off your existing loans until this is completed to avoid late payments that will affect your credit score).
You now have only the new student loan to pay off.
Make sure that you review your credit report a month later to verify that the old student loans are noted as paid off.
You have your specific student refinancing lender requirements. This might be the type of student loan, amount being financed, term of the loan, minimum APR required, school or degree criteria, etc. You should only apply to a lender that fits your requirements.
Student loan refinancing lenders also have their own requirements that vary by lender. In general the loan approval process is lenient versus other types of loans. Since school refinancing lenders want to issues loans to make money, you just need to make sure you can check off these basic items.
You will need a credit score in the mid-600s. A FICO credit score of 670+ is considered good. Remember you are applying for an unsecured loan, unlike a home mortgage or car. The lender is making their approval decision based on your previous credit payment history and your future earnings potential.
If you do not have a high enough credit score you can:
- Apply with a co-signer with a good credit score. (Most lenders will allow you to take off the co-signer after a period of time of consistent, on time loan payments.)
- Take steps to improve your credit score and then reapply. While you may have to pay off some accounts to improve your credit score, the savings from refinancing your student loan will likely be worth it.
Do you have enough income to afford your expenses and the new student loan? Lenders consider your total income and your debt-to-income ratio to assess your potential to repay the student loan. The lender is basically looking to determine how much of your income would be used to pay down debt on a monthly basis. The larger the portion of a your income goes towards debt, the potentially more difficult it may be for you to repay a new loan.
Industry lender DTI guidelines for mortgage mortgage approval is 43%, while for student loans is somewhat lower. Lenders will also take into consideration your school career path if it offers a high future earning potential such as medicine, lawyers and MBA graduates.
Most student loan refinancing lenders require that borrowers attended a Title IV-accredited school. Many, but not all, require borrowers to have earned a degree.
Do My Student Loans Allow Refinancing?
This depends somewhat on the type of student loan you are looking to refinance.
Private Student Loans
Refinancing a private student loan has few, if any lending costs (origination fees) in the lending process. If you are struggling to make consistent payments, you should make the effort to refinance your student loan. If approved, with a lower APR than your existing student loan, you can reduce your monthly payment making it easier to be consistent in your loan payments.
Federal Student Loans
Refinancing a federal student loan also has few, if any lending costs. However, if you are struggling to make consistent payments, you should NOT refinance your school loan.
If you are using the Standard Loan Plan of 10 year payments, you should consider an Income Driven Repayment (IDR) plan. The IDR, plans adjusts your monthly school loan payment based on your ability to pay, instead of the terms of the loan. The IDR plans can lower your monthly student loan payment and free up cash for other expenses.
However they DO NOT save you money in your school debt unless combined with a Federal Loan Forgiveness program.
Student loan refinancing relief does not cost money, unlike house mortgage refinancing. There are generally no origination, application or prepayment fees. But read your loan agreement carefully to make sure you understand any loan costs you could incur in the future, like late fees.
If you decide to refinance your student loans, compare multiple lenders to see who offers you the best rate. If you have similar offers you should give greater importance to lenders who offer the most flexibility with payments and the longest possible forbearance options.
When in doubt, do your due diligence, make a decision, and move forward with your life.
An overview of student loan refinancing relief is presented. This includes 1) What Is Refinancing; 2) Why Refinance; 3) When To Refinance; 4) How To Refinance; 5) Will You Qualify; and 6) What Types Allow Refinanncing.
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