When you refinance your student loan, you take out a new loan to pay off your existing education debts. For some people, it’s a smart move that can save money and improve their financial life. For others, refinancing student loans may not be the right move. Read on to learn how to decide whether a student loan refinance makes sense and what steps you can take to start the process.
Should I refinance my student loan?
Refinancing a student loan could help you get out of debt faster and potentially reduce your monthly payment obligations, but that depends on whether you can qualify for good business.
Before deciding to refinance your student loan, there are a few factors you should consider:
- Credit type: The type of loan you have can affect your refinancing options. Refinancing can only be done through private lenders, so refinancing your federal loan means you lose federal protection – like state forbearance, income-driven repayment plans, and more.
- Remaining time: Refinancing over a longer term can increase the total interest you pay on your loan. So when your loan is almost paid off, it may be cheaper to stick with the loan you already have. On the other hand, if you are at the beginning of your repayment period, the refinancing can have less of an impact on you.
- Current interest rate: Most people choose to refinance in order to get a lower interest rate. If you get a lower interest rate, you can pay less interest over the repayment period as long as you don’t extend your repayment period.
- Monthly payment: Refinancing is a good idea when you have an unmanageable monthly payment. Extending your repayment deadline can ultimately increase the interest you pay, but it can also lower your monthly bill.
When in doubt, use a student loan calculator to compare your current loan with any new loans you are considering.
How to refinance your student loan in 5 steps
There are five steps you need to take when you are ready to refinance your student loan:
- Check your credit history.
- Buy at the best price.
- Choose a loan offer.
- Fill out an official loan application.
- Sign your loan documents and start paying your new loan.
1. Check your balance
When applying for the refinance of your student loan, one of the first steps a lender can take is to check at least one of your credit reports and credit ratings. For this reason, you should periodically review your Equifax, TransUnion, and Experian reports for errors or mistakes. If you discover inaccurate information in a credit report, the Fair Credit Reporting Act (FCRA) gives you the right to appeal these elements to the appropriate credit reporting agency.
It is also advisable to get an overview of the current status of your loan before completing loan applications. If you find that your creditworthiness is not optimal, there is an opportunity to improve your creditworthiness before attempting refinance.
With the FCRA, you can visit AnnualCreditReport.com to request free reports from all three credit reporting agencies on a weekly basis.
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Checking your creditworthiness before refinancing will help you understand where your creditworthiness is and confirm that your reports are error-free.
2. Shop at the best price
Researching student loan refinance rates and checking with multiple lenders to find the best interest rate is a key element in successfully refinancing your student loan. In fact, hire installments should be done whenever you are looking for a new loan or credit card.
Search online to compare the rates and fees of lenders. If a lender offers a prequalification tool, take advantage of it; These types of applications only require a gentle credit request for your credit report. Prequalification can help you understand the type of interest rates and loan terms you may qualify for on a refinance. This information can help you determine whether a refinance will put you in a better position in terms of your monthly payment or the total interest paid.
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Take the time to check the rates and fees with at least three different lenders before taking out a new loan.
3. Choose a loan offer
After you’ve reviewed (and hopefully pre-qualified) multiple loan offers, it’s time to choose the option that suits you best. The lender you work with may also let you choose your preferred repayment terms.
A shorter repayment term (e.g. five years) can help you get a lower interest rate and pay off your debt faster. However, your monthly payment would likely be higher. If, on the other hand, you extend the repayment period, you can reduce your monthly payments and make it easier to manage your budget. The tradeoff is that more interest will be paid over the life of the loan and more time will pass before you clear the debt.
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Look at your budget and overall financial situation to help you decide which loan terms make the most sense.
4. Complete an official loan application
You’ll need to complete an official loan application once you’ve narrowed down your preferred lender and loan range. Even if you’ve gone through a lender’s prequalification process, you will need to complete this step before your loan can be approved.
At this point, the lender will likely request a hard credit request to access your full credit report.
The lender also wants additional information that you did not provide on your prequalification form. If you are applying with a co-signer, you must also provide their information. You may need to provide copies of documents and information to the lender, such as:
- Social Security Number (SSN).
- Driver’s license or official ID.
- Loan repayment statements from existing lenders or student loan service providers.
- Proof of graduation.
- Proof of employment (pay slips, W-2, etc.).
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Having your loan records ready before completing your refinancing application will make the process smoother and faster.
5. Sign your loan documents and start paying your new loan
Once your loan has been approved, sign your loan documents. Technology has made this step a lot easier; Where you used to have to personally sign, fax or mail loan documents, most student loan companies now do their entire process online for the ultimate in convenience.
Once your documents are signed and filed, start paying your new loan like you did with your old one. Be aware, however, that your new lender may not immediately repay your previous loans; sometimes the process can take a few weeks. Keep making any student loan payments due in the meantime so you don’t face late fees or a possible negative credit report.
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After you have signed your loan documents, keep paying your old loan until the transfer is officially made.
FAQ on refinancing student loans
How do you find out if you are eligible for student loan refinancing?
Prequalification is a great way to determine if you are eligible for a student loan refinance. While prequalification does not guarantee that you will be approved, it can help you determine if you meet the minimum criteria set by lenders. In general, you need a mid to high credit score of 600, a debt to income ratio of less than 43 percent, and a stable source of income.
How long does it take to refinance a student loan?
After you have completed a loan application and submitted the required documents, your refinancing application can be approved within a few days or weeks.
Can You Refinance Federal Student Loans?
You can refinance federal student loans, but you must do so with a private lender. This means you forego government safeguards such as reprieve and forbearance, as well as access to benefits such as income-based repayment plans.
Can you transfer student loans in someone else’s name?
Student loan refinancing allows you to transfer student loans to someone else. Some parents do this with loans they took out for their child’s education – they transfer those loans to the child once they are employed. Note, however, that the loan has new terms and new interest rates based on the creditworthiness of the new borrower.
Can you refinance student loans with poor credit ratings?
There are many lenders who refinance student loans for people with poor credit scores. However, if a lender accepts a lower credit score, they will almost certainly be offering higher interest rates. As with new student loans, you can often apply for refinancing with a creditworthy co-signer, which could help you qualify if you have bad credit.
Do your homework, compare multiple offers, and consider the risks and benefits of refinancing before you fill out an official loan application. Student loan refinancing is a good option for many people, but not for everyone. Refinancing federal student loans is usually not advisable, but if you have private loans and get a better interest rate from refinancing, this is worth considering.