Whether you're fresh out of school or have been out for a while, you may be struggling to pay off your student loans due to high interest rates.
If you are, you may want to consider refinancing, which essentially means paying off your original loan and opening a new one, ideally with terms that make the loan more affordable. But how do you refinance your student loans?
What Is Student Loan Refinancing?
Through refinancing, lenders offer student loan borrowers a way to lower their rates and monthly payments, potentially saving thousands of dollars in interest during your repayment term. Keep in mind, however, that even when you lower your payments, you may be increasing the amount you pay over the life of the loan.
As with many things, the devil is in the details of your student loan refinancing. Most student loans are provided by the federal government, so before you decide whether you'll refinance your student loans, know that when you choose to refinance with a private lender, you forfeit certain federal student loan protections such as:
- Student Loan Forgiveness: When a student loan is discharged, canceled or forgiven through programs such as Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment Forgiveness upon eligibility.
- Income-Based Repayment Plans: This plan sets your monthly student loans payments based on your income and family size to make it more affordable.
- Deferment or forbearance: If you meet the criteria, you may be able to temporarily stop or reduce your federal student loan payments.
How to Refinance Your Student Loans
If you're ready to refinance your student loans—be it private or federal student loans—first, know that you're not alone: 44 million Americans have student loans and collectively they owe over $1.48 trillion in student loan debt. Americans owe nearly $620 billion more in student loans than they do on their credit cards. As of 2017, the average student loan balance was $34,144.
Americans owe over $1.48 trillion in student loan debt.
Now, read on to learn the 7 keys to getting started and improving your approval chances.
1. Determine Your Ideal Interest Rate
Before you even start looking for a lender, it's essential that you find out what you're currently paying in interest. According to Federal Student Aid, interest rates on a federal student loan can range from 4% to 9% while the average private student loan interest rate is between 9% and 12%.
Once you've figured out your current interest rate, it's time to start looking at lenders who offer lower interest rates. This will also help you figure out your ideal loan repayment term and even whether refinancing is right for you.
2. Establish a Manageable Repayment Term
In addition to the interest rate on your current loan, make sure to take into consideration your total payoff amount and term. The total payoff amount includes both your principal amount and any interest you may still owe. The term is the duration in which you'll agree to pay off the full amount.
(Make sure to check the total payoff amount—shown on your online account—with any lenders as the amount may vary from the amount showing on your statement depending on when you process the repayment.)
Depending on whether you have a higher or lower student loan balance currently, you may consider a longer term to make your monthly payments more manageable. Just note that there is a tradeoff; for example, if you have a higher balance and you decide to set a more extended repayment period, you'll pay more on interest compared to a shorter term.
Here's a quick reference guide for when to consider a short- or long-term repayment plan:
|Short-Term Repayment Plan||Long-Term Repayment Plan|
|Your total loan amount is low||Your total loan amount is high|
|Your interest rate is high||Your interest rate is low|
|You have extra cash flow||You don't have additional cash flow|
3. Check Your Credit Report
When you apply for student loan refinancing, most reputable lenders will almost always pull your credit report from one or more of the three credit bureaus—Experian, Equifax or TransUnion. This is known as a hard inquiry, meaning it will show up on your credit report. The lender will consider your credit scores, history of on-time payments and credit utilization rate to determine whether to give you the loan.
So it is crucial that you check your credit report ahead of the application process to ensure that your information is accurate and up-to-date. Note that it does not hurt your credit scores to check your credit report, and tools like Experian CreditWorks help you monitor your credit.
4. Calculate Your After-Tax Income
Private lenders will also ask for your income to determine whether your earnings are sufficient to pay back the loan. In addition to being a factor for lenders, knowing your after-tax monthly income will help you calculate how much you can afford to pay towards your student loans every month.
Look through your pay stubs to add up your after-tax monthly income and subtract your monthly expenses (i.e., rent, utility, entertainment, savings, etc.) to determine the monthly payment amount that you can afford. Make sure to be realistic in setting your living expenses, so you do not take on any additional burdens.
5. Consider a Cosigner
If your income isn't high enough or your credit isn't good enough, you might need to get a cosigner on your refinanced loan—a parent, spouse, sibling, etc.
Just make sure any potential cosigners know what they are getting themselves into, as there can be consequences for them should you miss a payment or default. Also, if you got your original student loans with a cosigner and now are making enough money to qualify on your own, you may use refinancing as an opportunity to remove your original cosigner from your student loans.
6. Pay Down Other Debt
Consider how much other debt you have—mortgage, credit card debt, auto loan debt, etc.—to determine your debt-to-income (DTI) ratio. Your DTI compares the total amount you owe every month to the total amount you earn.
Similar to your credit utilization rate, the lower your debt-to-income ratio, the higher your chances of getting approved as lenders may deem your credit standing more fit for the loan. So before you apply for student loan refinancing, take a look at your other debt obligations and pay off as much as you can.
7. Choose the Right Lender for You
When it comes to selecting the lender to refinance your student loans, having options is essential. But there are many scammers out there who promise to eliminate student loan debt for a few hundred dollars. Established lenders such as SoFi and Upstart have many fans, with borrower testimonials. Using a credible source to refinance your student loan is always recommended.
In addition to favorable interest rate and repayment terms, make sure to do your due diligence on the availability, and extent of support and customer service provided by the lender. Refinancing student loans can take time, so make sure to select a lender who will help you reduce stress by helping you through the process.
You've Refinanced Your Student Loans. Now What?
Once you've selected the best lender for you, applied and accepted the terms, take a minute to celebrate your lower interest rate and favorable payoff terms. Hopefully, your new terms have reduced the stress and burden of the former loan conditions.
But you're not at the end of the road just yet—make sure to budget accordingly to stay on top of making monthly payments, so there's no negative impact on your credit scores. If you keep making your payments, not only will your credit scores benefit, but you'll be one step closer to becoming debt-free.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.