The benefits of refinancing your student loans include the potential for a lower monthly payment, a lower interest rate which results in paying less money overall, streamlining multiple payments into one (making your loans easier to manage) and can also release a cosigner from your current loans. Here is what you need to know about refinancing your student loan.
Keep in mind that refinancing federal student loans means a loss in many benefits that only federal loans offer. These include an option for potential loan forgiveness, income-driven repayment plans, generous deferment options if you become unemployed or have an economic hardship, and an option to discharge loans for death or disability.
Step 1: Understand your current student loans.
The first step is taking a closer look at your current student loans and what is your goal of refinancing.
Do you have federal student loans, private student loans or a mix of both? Keep in mind that when you refinance a federal student loan into a new, private loan, you will lose many of the perks that went along with it, including the potential for an income-based repayment plan or student loan forgiveness.
What is the current interest rate of each loan? This is the number you will want to beat when refinancing your loans.
When you refinance a loan, you get a brand-new loan with a brand-new rate. With interest rates low, it is a good opportunity to shop around for a new loan.
Step 2: Select a lender for your new loan.
There are many things to consider when selecting a lender for refinancing student loans. Most importantly, you’ll want to compare interest rates to see who can offer the lowest rate. A fixed rate means that it will stay the same, while a variable interest rate has the potential to change. Credible allows you to compare rates from 10 lenders without impacting your credit for free.
The following are items to consider for each lender in addition to the interest rate:
- What types of fees are charged, such as an originate fee or prepayment penalty?
- What are the requirements to qualify? Some lenders require a minimum amount to refinance or completion of your degree program in addition to other general requirements.
- Do they offer any other type of benefits or perks? There may be an option to temporarily pause payments, flexible loan terms or a choice of your exact monthly payment.
- Earnest offers an option to customize your payment amount to work with your budget. You can also opt for biweekly payments, and adjust your payment due date to whenever you’d like. Plus, you may be able to put your loans in forbearance (temporarily pausing payments due, as interest still accrues) if you're experiencing high medical bills.
- With College Ave, you can get your new interest rate in one minute and choose from 16 different repayment terms.
- SoFi gives free personalized financial advice from accredited advisors and get a discount on future loans.
- FIGURE offers forbearance on student loans up to 12 months.
- LendKey offers an opportunity to put loans in forbearance during an economic hardship and has a refer a friend program, where you can earn cash for referrals.
Step 3: Apply for your new loan.
Before you apply, understand what is required for student loan refinancing. You’ll generally need a debt-to-income ratio under 50%, a minimum credit score of 650, a steady job and no current loans in default. Many lenders also require that you have completed your degree program.
Check your credit report for free to address any potential errors that could be lowering your score.
With online lenders, it will take just a few minutes to apply online and receive approval. You may have the option to selecting a loan term for your new loan. A shorter term is going to mean higher monthly payments, but you will be paying off your loan sooner and overall save money on interest.
Need a little help qualifying for refinancing? If your credit is not so great you may want to apply for the loan with a cosigner. Choose someone with a solid credit history. The lender will base borrowing decisions based on the higher of the two credit scores and you will have a better chance of being approved.
Step 4: Knock out your student loan debt.
Continue to make payments on your previous loan until you have set confirmation that it’s been taken over by your new lender.
Consider signing up for automated payments. The payment gets pulled out of your checking account each month, reducing the chance for a late fee. Some lenders will give you a discount on your loan’s interest rate when you agree to pay your loan this way. Be sure to check.
More Resources for Eliminating Student Loan Debt
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