Refinancing a student loan can be an effective way to save money on interest or restructure your payment schedule. It is also good experience for young adults who later may have mortgages that they will want to refinance. There is just one catch though: student loan refinances can be hard to get.
That should not discourage you from looking into the possibility of refinancing a student loan. Think of it as an obstacle course – a series of challenges that will test your resourcefulness. If you deal with those challenges one-by-one you will have a decent chance of succeeding.
9 Reasons Student Loan Refinances Can Be Hard to Get
What are some of those challenges? Here are some things to be prepared for when you look to refinance a student loan:
- The government isn't interested. If you have a government-backed student loan, don't expect to find a government-backed student loan refinance program because they don't exist. You can refinance into a private loan, but keep in mind this means losing the benefits of a government-backed loan, which may include loan forgiveness under certain circumstances and income-based repayment programs.
- Interest rates may not be in your favor. If you got your student loan in recent years, you may already have benefited from a low interest rate, and would be hard-pressed to find a better one.
- Your credit may be a problem. Student loan programs are designed to accommodate people with limited credit histories, which is the case for most people entering college. However, there is a difference between a limited history and a bad history. If you have made mistakes along the way, your credit score may preclude you from refinancing your student loan.
- You need a good-paying job. Lenders want to see evidence that your income will support repayment of the loan, so if you are not earning much you may not qualify for refinancing. Yes, this is a Catch-22 – the people who most need refinancing are often the least able to qualify for it.
- Longer loans can carry a higher cost. Extending the remaining term of your loan is one way to reduce your monthly payments, but this can cost you dearly in the long run. Longer loans often carry higher interest rates, and in any case they will require you to pay interest over more years. Compare the full total of principal and interest rate payments between your current loan and any refinancing possibility before you commit.
- The bank may not like your school. If you attended a school or got a degree that the lender does not feel gives you a meaningful credential in the job market, they may not want to give you a loan.
- The origination fee may not be worth it. Origination fees upon refinancing can represent 2 percent of your remaining loan balance, so be sure to factor this in. You may find this expense overwhelms any potential benefit from refinancing.
- Other debt might get in the way. Lenders are big on debt-to-income ratio, a comparison between how much you owe and how much you make. If you are thinking about refinancing your student loan, you may be better off doing so before taking on other debt such as a mortgage or a car loan – and watch those credit card balances as well.
- You – or your parents – might be ready to "cut the cord." If your financial credentials are not up to snuff, the lender might demand that somebody co-sign for the loan before you can refinance. Your parents may have done this back when you were going to college, but once you have started to build a life of your own you may want to operate more independently. Or, your parents may want to devote their financial resources to other needs, such as getting your younger siblings through college or saving for retirement. In any case, unless you have access to a co-signer with solid finances, your chances of refinancing may be diminished.
Yes, student loan refinances can be hard to get, but it might be worth running this particular obstacle course. Online resources can help you screen lenders quickly to speed your journey through the obstacles. Then, if you are successful, the great thing about refinancing is that once you get it done it can benefit you for years to come with no further effort on your part.