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10 Key Questions to Ask Before Refinancing Your Student Loans
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Refinancing your student loans can be a smart strategy. You may be able to secure a lower student loan rate, reduce your monthly payments or otherwise renegotiate the terms of your debt.
But like most money moves, refinancing needs to be carefully thought out to ensure it’s the best option for you personally. While it might benefit some borrowers, it won’t make sense for everyone.
So if the question “Should I refinance my student loans?” is on your mind, here are 10 other, more specific questions you should ask yourself first to make your best decision.
- 1. What is my main goal for refinancing student loans?
- 2. What interest rates can I get?
- 3. What are my student loan payoff amounts?
- 4. How much can I afford to pay each month?
- 5. Will I need federal student loan repayment options in the future?
- 6. Do I have good enough credit to refinance my student loans?
- 7. Do I meet lenders’ income requirements?
- 8. Do I need a cosigner? Is cosigner release an option?
- 9. Does the refinance lender offer flexible repayment options?
- 10. What type of support and customer service does the lender provide?
- Also: Is refinancing good for your student loan repayment?
The first thing you need to think about is the outcome you’re hoping for by refinancing student loans.
There are some great reasons to refinance student loans: You can lock in lower interest rates, reduce monthly payments or get rid of debt faster.
It’s important to be clear on which benefits are most important to you. Your central student loan refinancing goal will guide your decision and help you choose the loan that will best meet your needs.
If you want to get a lower interest rate, first take a look at what your rates are now. Over the past 10 years, interest rates on federal student loans have ranged from 3.40% to 7.90%, depending on the type of loan and the rates offered at the time of origination. Private student loan rates have an even wider range, from about 2% to nearly 15%.
When you refinance your loans, you replace existing student loans with a new one. This gives you a chance to shop for a lower interest rate and get a better deal.
The higher your current interest rate, the more you could potentially benefit from refinancing. But note that you’ll also need to have good credit and to meet the underwriting criteria with some of the best lenders in the market that refinance student loans.
A lower student loan interest rate can save you a good sum of money, since it reduces both your monthly payments and the amount of interest you’re assessed over the life of the loan.
When researching the interest rates on your loans, also note your “loan payoff amount” — the payment you’d need to make to pay off your student loans in full. It will be higher than the balance displayed on your loans because it includes any interest you still owe.
Knowing this number is important because the total payoff amount for all the student loans you hope to combine through refinancing will be the balance of your new loan.
Refinancing student loans can change your loan terms and monthly costs. If you’re considering refinancing student loans, you’ll want to make sure your new payments will be manageable.
Once you have your payoff amounts, you can estimate what your monthly costs could look like. This is an important consideration, since you’ll want to decide on the right student loan repayment period based on your needs. For example:
- A longer student loan term will result in lower monthly payments, which could be important if you have a low income, high living costs, a high student loan payoff amount or a combination of these.
- A shorter repayment term will help you get out of debt faster and often comes with a lower student loan interest rate, helping you get out of debt while paying less.
Of course, borrowers’ abilities to repay will also depend on their own unique circumstances.
The payments you’ve already been making can give you a baseline of what’s affordable for you. If you’re already making extra payments, that’s a good sign you could afford to switch to a shorter repayment period to save even more.
But if it’s been a struggle to make payments, consider refinancing under terms that will lower your monthly payments and give you more breathing room in your budget.
Are you struggling with payments? Does your income vary from month to month? Is your financial situation otherwise uncertain? These could be signs that refinancing isn’t right for you, at least not if you have federal loans.
That’s because refinancing with a private lender pays off federal student loans and replaces them with a new private student loan. This action is irreversible and will mean losing access to several important protections granted to federal student loan borrowers.
If you’re looking to refinance federal student loans, you should know what you’re giving up. Federal student loans offer many protections that won’t be available if you refinance, such as:
- Alternative repayment plans, including affordable income-driven repayment options
- Federal student loan forgiveness programs
- Deferment or forbearance under federal rules
Before refinancing, you should be confident that you can keep up on payments, both now and in the future, before giving up these protections.
Your credit history will be a central factor that lenders will consider when deciding whether to approve or deny your student loan refinance application. Reviewing your own credit can help you see if you have a good credit score to refinance student loans.
As you can imagine, it’ll be much easier to qualify for a refinance loan and get favorable terms if you have good credit. A good-to-excellent credit score is required by most lenders, with minimum score requirements often set at 650 to 680.
Likewise, your score will usually affect which rate you’re offered, as most lenders reserve the lowest rates for borrowers with excellent credit (in the mid-700s and above).
If you know your credit score, you can see the interest rates and terms for which you might qualify. And if you don’t know your score, you can view and track it for free using My LendingTree.
Many refinancing lenders will also provide a free soft credit check in order to provide you with an initial interest rate quote. This is preferable to a hard credit check, which could lower your score by a small margin.
Generally, refinancing lenders will want to see that you have a steady income, so they can feel confident you’ll be able to afford the monthly payments and repay your student loans.
Some lenders have income requirements but don’t publish them, while others list their minimums so you can gauge your eligibility.
|Education Loan Finance||$35,000|
As of May 19, 2020
As a general rule, annual earnings near the national median household income of $63,179 (as reported by the U.S. Census Bureau) should give you a decent chance of qualifying for refinancing, with higher incomes viewed even more favorably.
But income isn’t the only factor that lenders look at to decide if you can afford your student loans. Many will be interested not only in how much you make, but also in how much you owe relative to your pay. This is measured with a debt-to-income (DTI) ratio — the proportion of your monthly income goes toward minimum payments on existing debt.
The lower your DTI ratio, the better. For example, a 43% DTI is typically the highest you can have and still be considered for a home mortgage. For refinancing student loans, you’d also likely need to have a ratio below this level.
If you get rejected for student loan refinancing, or if you think that your income or credit score is too low to qualify, don’t give up yet.
Many lenders will allow you to refinance student loans with a cosigner who meets their lending requirements. Adding a cosigner could also help you snag a better student loan refinance rate than what you’d be offered on your own.
Alternatively, you might want to refinance a student loan to release a cosigner from your original student loan, replacing it with a new loan that doesn’t include that person. Perhaps, for instance, your parents cosigned a student loan with you when you first entered college — if you now have a reliable job and a good financial history, it might be a good idea to remove them as a cosigner by refinancing the loan.
Even if you are confident in your ability to repay your student loans, there are no guarantees in life. It could still be wise to consider refinancing with lenders that offer borrower protections, such as deferment and forbearance.
While refinancing student loans means you’ll lose access to federal repayment plans, your lender might still provide flexible payment options of its own.
Check to see if they have policies that allow you to adjust your payments if you’ve hit a rough financial patch. You should also ask about their policies and willingness to work with borrowers who are struggling to repay.
SoFi, for example, provides unemployment protection on its student loans, allowing borrowers to pause payments in the case of a job loss. SoFi even sets you up with a career coach to help you get back on your feet. As for your student debt, you could take a break from repayment in three-month spans — and up to 12 months overall — as long as you lost your employment through no fault of your own. Of course, like other forbearance periods, interest continues to accrue while you’re not making payments.
Many private lenders, such as Laurel Road, will also honor any grace period on your existing loan — which, for federal student debt, covers the first six months after you leave school. So even if you refinance right after graduating, you’ll still have some payment-free time to get on your feet.
It’s important to get the initial terms and interest rates right on your student loan refinance. But you should also consider the kind of experience each lender offers.
As student loan borrowers ourselves, we have dealt with loan servicers or lenders that provide poor customer service. A lender like that will add to your student loan stress and make managing this debt a miserable experience.
But a lender with solid customer service can help you manage your student debt more effectively and quickly resolve any issues that might arise.
You could be working with your new refinancing lender for the next five to 20 years. Be sure to do your research and shop around before refinancing your student loans to ensure that you save money and have no regrets.
Consider your answers to each of the 10 questions above. They’ll help you confirm whether you’re eligible for refinancing and whether you could benefit from a refi loan, as well as ensuring you choose the right lender for your new debt.
One more way to clarify whether refinancing is good for your situation is to review the pros and cons of consolidation. If there are more pros in your favor, then you’ll have your answer.