Student loan payments are a drag on virtually any budget. Refinancing those student loans can be a great way to save money on payments and provide relief. If you're wondering how to get approved for a student loan refinance, you're not alone. A recent study from Citizens Bank reveals close to 80 percent of Millennials received some sort of federal aid while in college. Another report indicates 70 percent of Millennials have student loan debt. If you're a part of these statistics, here are some things to keep in mind if you want to refinance your student loans.
Know Your Credit
As a recent college graduate, you may have a limited credit history. That's understandable and refinance companies often keep that in mind as a limited history doesn't necessarily mean you're not responsible. That being said, there's a difference between a limited credit history and a bad credit history – such as one that's filled with late payments.
A bad credit history results in a lower credit score, making it more difficult to refinance your student loans. If you decide to pursue refinancing, checking your credit report is an important first step. You can get a free report annually from each of the three major reporting agencies at AnnualCreditReport.com. Look for any derogatory marks like late payments or collections as they directly impact your score.
If you have less than stellar credit, you still have options to refinance – the main one being getting a co-signer to join you on the refinance. There are risks for the co-signer to consider, but it may be an option to consider to relieve the stress of your current payments.
Kill Other Debt
Student loan refinance companies don't look at your student loans in a vacuum. They also want to know what other outstanding debts you may have. Your total outstanding debt directly impacts your debt-to-income (DTI) ratio, which measures your total debt against your income. The higher your DTI, the more difficult it is to make payments, which poses a risk to refinance companies.
Each company has a specific number they require, but if you keep your DTI to 35-40 percent or less, this will generally put you in a good position to refinance. If you're over that number, look at your other debts – car loans, credit cards, etc. – and work to pay them off. You may have found an account you forgot on your credit report; if so, contact them to pay off the debt. Each of those actions will help you lower your DTI and put you in a better position to refinance your student loans.
Up Your Income
It may seem odd when asking how to get approved for a student loan refinance, but you need to make a certain income to find success. Don't take this personally, as you may not be able to control your income, but lenders want to see that you have the means to repay the loan. If not, it will be difficult to refinance your student loans.
Changing jobs may not be easy, but like with the credit option, adding a co-signer is a way to help improve your chances of a refinance as they're also considered liable for the loan. Again, this can pose risks to the co-signer, but may be worth it if you're struggling with your current payments.
Don't Overlook Benefits When Refinancing
When looking at the question of how to get approved for a student loan refinance, it's important to ask yourself if you should even pursue a refinance. In many cases, it makes sense to refinance your student loan, but in some cases it may not. Some of those instances are:
- Getting hit with a pre-payment penalty for paying off the loan early. You want to pay off the loans as soon as possible, not delay it due to a fee.
- Giving up benefits through your current loan. One such example is income-based repayment options, or loan forgiveness, for those in public service.
- Similar to the above, you may lose out on deferment or forbearance options available through federal loans if you refinance.
You may have other benefits through your particular loan, so it's important to know how your specific loan works. If you have no need for any of the benefits, then it may make sense to check out what kind of refinance rates you can get.
There are a number of factors that go into getting approved for a student loan refinance. With a little diligence, you may be able to save significant money on each monthly payment.