How To Refinance Student Loans in 7 Steps
Refinancing your student loans may save you money. And even though $20 or $30 a month less doesn’t seem like a lot, over the life of the loan, this can amount to thousands of dollars saved. However, refinancing is different from consolidation. Once you’ve refinanced your student loans, it can’t be undone.
So before you rush into anything, let’s take a look at how to refinance student loans. This will make sure it’s the right choice for you while improving your chances of being approved.
1. Determine student loan refinancing goals
Borrowers refinance for a number of reasons. Whether it’s reducing your monthly payment or paying off your student loan sooner, your reasons for refinancing are an important first step toward determining what’s best for you. You may want to:
- Lower your monthly payment. This is one of the most common reasons for refinancing. If you extend the term of your loan you will more than likely pay less monthly, but for a longer period of time, so you end up paying more interest over the life of the loan.
- Pay off your student loans faster. If you keep the same payment amount and term while reducing your interest rate, then you can actually pay off your loans faster, since more of your money is going toward the principal.
- Get a lower interest rate. Interest rates are always changing. When you have loans at a higher interest rate and have an opportunity to refinance at a much lower rate, it can save you a lot of money in interest over the life of the loan.
- Remove a cosigner from your student loans. Often, students take out a loan with a cosigner. Later, after graduation, you may wish to remove the cosigner from the loan. Refinancing is the way to do this.
- Obtain a more flexible payment plan. Refinancing can allow you to change the terms of your loan, allowing you to adjust the payments to meet your needs.
- Reduce many payments into one payment. Some people don’t like having to deal with multiple payments. Refinancing condenses all those payments into one simple payment.
2. Learn your current credit score
Once you know your reason for refinancing, the next step in the process is to get your credit score. The reason is simple. If your credit score is lower than when you first took out your student loans, improve your credit before refinancing your student loans. If your credit score is higher, consider refinancing. Here are two reasons why a higher credit score will help you in the refinancing process:
- Interest rate: Having a higher credit score will lead to a lower refinanced interest rate for your student loans.
- Terms: Having a higher credit score will lead to loan terms that are stacked in your favor.
3. Use a student loan refinancing calculator
When you have a $15,000 loan at 7.3% interest and you have a refinance offer at 3.8%, it’s easy to see you’re saving money.
But what if you have three loans: $15,000 at 3.8%, $10,000 at 6.7% and $5,000 at 5.4%, and a refinance offer at 4.2%. Not as easy to tell, is it?
That’s where a student loan refinance calculator comes in handy. It’ll help you determine if refinancing will help you achieve your goal we talked about in step one.
4. Be sure the benefits outweigh the loss
While there are many benefits to refinancing private student loans, there are four things you lose when you refinance your federal subsidized and unsubsidized student loans:
- Income-based repayment plans
- Student loan forgiveness programs
- Deferment options
- Forbearance options
Whether you refinance them in combination with or without private student loans, once you refinance federal student loans, it can’t be undone. So think carefully and make sure the benefits outweigh any potential loss from these options.
5. Comparison shop
Shopping around for the best rates and terms for your student loan refinance is essential. But you may also want to consider other aspects of the loan as well. Finding a lender you can trust may be more important than getting a slightly lower rate. Finding a lender who you can talk to and who you feel comfortable with may be something to consider.
You may also want to look at the eligibility requirements from various lenders. It may be easier to qualify through some lenders over others. Consider the types of fees the lender charges, including application fees, origination fees, or early repayment fees. Some lenders with lower interest rates may charge more fees, reducing the savings of a lower interest rate.
6. Choose a lender & apply
You can get refinance offers from multiple lenders with a minimal amount of information. In most cases, your name, the school you attended, graduation date, and citizenship are all that’s needed.
Looking at these offers typically only requires a soft pull on your credit, meaning your credit score won’t be affected if you just want to take a look. You’ll see options for repayment terms (usually 5, 10, 15, or 20 years), options for a fixed or variable rate, and an estimated monthly payment amount. A hard credit check will be run once you accept the offer and begin your application process.
A loan offer may look like this:
Loan amount: $30,000
Repayment term: 20 years
Variable rate: 4.39% – 8.24% APR
Monthly payment: $373 – $547
Fixed rate: 6.49% – 10.99% APR
Monthly payment: $236.79 – $312.93
When it comes time to choose a lender and apply, here’s how to be prepared.
- Eligibility. Make sure you are eligible for the loan. Some lenders don’t offer loans in certain states. Others may require minimum loan amounts in order to refinance. Almost all lenders will have credit score, employment, and debt-to-income requirements. Make sure you meet those requirements.
- Current loan information. Have all the information on your current student loans, including the name of the lender, how much you owe, interest rate, and monthly payment amount.
- Personal information. Make sure you have all your personal information handy, like your social security number, address, employer information, pay stubs and W2s, and information on your cosigner, if you have one.
Keep in mind that most lender offers expire after a certain amount of time. So, make sure you take action before the loan offer you have is no longer valid.
7. Tie up loose ends
Once you submit your application, it will go through the lender’s evaluation process.This may take some time–anywhere from a week or two, to a month. Whatever you do, don’t stop making payments on your current student loan! Before you stop paying, make sure you don’t have any remaining payments due. Once your obligations to your old lender are fulfilled, set up your payment information with your new lender.
Now that you have learned how to refinance student loans, follow these steps to assure your refinance process goes quickly and smoothly.