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Refinancing student loans involves paying off one or more existing loans with a new one through a private lender. Depending on your situation, refinancing your student debt could potentially help you secure a lower interest rate and monthly payment, and it can also simplify your repayment plan. But if you're refinancing federal student loans, it also means you'll lose the benefits that those loans offer, so it's important to make sure it's the right move for you before applying.
If you're thinking about refinancing your student loans to better manage your debt, here are six steps you can take.
1. Decide if Refinancing Is the Right Choice for You
There are both benefits and drawbacks to refinancing student loans, especially if your loans are federal instead of private. Understanding them can help you determine whether it's the right move for you.
Pros of Refinancing Student Loans
- Potential for a lower interest rate: Depending on your current loan terms, you may be able to qualify for a lower interest rate with a private lender. This may be particularly true if you have great credit or a creditworthy cosigner.
- Potential for a lower monthly payment: With a lower interest rate, you may automatically qualify for a lower monthly payment. You can also reduce your payment by selecting a longer repayment term. Just keep in mind that a longer term typically means more interest charges over the life of the loan.
- Simpler repayment: Replacing multiple monthly payments with just a single payment can make your life a lot easier.
Cons of Refinancing Student Loans
- No guaranteed cost savings: While student loan refinancing can help you get a lower interest rate or monthly payment, it's not a guarantee, especially if your credit isn't in good shape and you don't have a cosigner with great credit.
- No federal benefits: When you refinance federal student loans with a private lender, you'll lose access to a host of relief options, including student loan forgiveness programs, income-driven repayment plans and generous forbearance and deferment options.
- You can't reverse the process: Once you refinance your student loans, whether federal or private, you can't reverse the process if you change your mind. As such, it's important to make sure it's the right choice for you before you get started.
2. Check Your Credit
Most student loan refinance companies require a credit score in the mid-600s or higher to get approved. However, if you want to qualify for a low interest rate, you'll likely need a credit score in the upper-700s or have a cosigner who meets that requirement.
Check your credit score to get an idea of where you stand. If your score is low, review your credit report to understand what's impacting your score and take steps to improve your credit before you proceed.
Potential actions you can take may include paying down credit card balances, disputing inaccurate information on your credit reports and continuing to make on-time payments on your existing loans and credit cards.
3. Compare Rates With Multiple Lenders
Each lender sets its own eligibility criteria and loan terms, so it's critical that you shop around and compare rates from multiple lenders to ensure you get the best deal.
Fortunately, student loan refinance companies typically offer prequalification, which allows you to view rate quotes with just a soft credit inquiry, which won't impact your credit score. These aren't final offers, but they can give you a good idea of what you might qualify for.
Try to get prequalified with at least three to five lenders to get a good sample for comparison.
4. Choose the Best Loan Offer
Once you've gathered quotes from multiple lenders, choose the one that best fits your needs and goals. In addition to interest rates, you may also want to consider available repayment terms, forbearance and other relief options and cosigner release programs (if applicable).
You may also want to look up customer reviews of each lender to get a glimpse into what your experience will be like.
5. Fill Out an Application
Once you've decided on a lender, you can fill out an application through its website. The application process can vary depending on the lender, but you'll generally need to provide some basic information about yourself and your student loan debt.
You may also be required to provide some documentation, such as a copy of your government-issued photo ID, a recent pay stub and a current statement from your current lender or loan servicer.
6. Wait for the Refinance to Be Approved
Once you submit your application, you may get an answer within a day or two. However, the lender may take more time to evaluate your application if you have a cosigner. In some cases, it can take a couple of weeks to get a decision.
If you're approved, you'll receive a final offer, which may or may not be the same as the initial quote. Review the loan agreement and, if you agree to the terms, sign it electronically. Once you complete the process, it may take a few weeks for the lender to pay off your original loans.
To avoid potential late charges and credit score issues, though, it's a good idea to keep making payments on your original loans until you confirm that the balances are zero. Your new lender will notify you of your new monthly due date and encourage you to set up automatic payments.
Think Carefully Before You Refinance Student Loans
There aren't a lot of downsides to refinancing private student loans, especially if you can get better terms with a new lender. But refinancing federal loans can come with a host of drawbacks. Even if you don't anticipate needing access to student loan payment relief options, your financial circumstances can change.
Before you begin the process of refinancing your student loans, evaluate your situation and goals and consider how the move could impact you in both the short term and the long run. Also, consider other ways to pay down student loan debt that don't involve an irreversible decision.