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Refinancing your student loans involves taking out a new loan to pay off your existing educational debt. Like the consolidation process for federal loans, refinancing can combine your existing loans into one simple monthly payment, potentially at a lower interest rate or with more advantageous terms.
After evaluating whether this process is right for you, you can check your credit and shop for the best rates. Taking these steps can help you figure out what lenders you might qualify for and find the best deal for your unique financial situation. If approved for a loan with a lower rate, you could save thousands of dollars on interest.
1. Check your credit
When you apply to refinance your student loans, one of the first steps a lender will take is checking at least one of your credit reports and credit scores. Knowing your credit score before applying can help you understand what interest rates are fair to expect and can help you to be a more informed consumer overall.
Federal law entitles you to a free copy of your credit reports from Equifax, TransUnion and Experian once every 12 months at AnnualCreditReport.com. Check regularly for mistakes and errors on these reports. If you discover inaccurate information on a credit report, the Fair Credit Reporting Act (FCRA) gives you the right to dispute those items with the appropriate credit-reporting agency.
It’s also wise to understand where your credit currently stands before filling out loan applications. You typically need a good credit score — usually defined as a FICO score 670 or higher — to qualify for student loan refinancing without a cosigner. If you find that your credit isn’t in the best shape, you can work to improve your credit before you try to refinance.
2. Shop for the best rate
Researching student loan refinancing rates and checking with multiple lenders to find the best rate is a key element in successfully refinancing your student loans. Rate shopping should be something you do anytime you’re looking for a new loan or credit card. In general, the higher your rate, the higher your monthly payments. On the flip side, qualifying for a loan at a lower rate can lower your monthly payments.
Each lender uses different criteria to determine your borrowing eligibility and interest rates. Your rate will likely vary between one lender and the next and can be impacted by factors like your credit history, the repayment term you select, and whether you choose fixed or variable interest on the loan. When shopping around and comparing lenders, you will want to consider:
- Whether the interest rate you are quoted is fixed or variable
- If the refinanced loan would have simple or compound interest
- If the lender offers bonuses or incentives for refinancing
- Customer service: read reviews of prospective loan servicers. Are they responsive to phone, email, or chat inquiries? Are borrowers satisfied with their experiences?
Compare lender rates and fees online before applying to refinance your loans. If a lender offers a prequalification tool, take advantage; these applications require only a soft credit inquiry on your credit report. Getting prequalified can help you see the rates and loan terms you might qualify for if you refinanced. You can use this information to see if refinancing would leave you any better off in terms of your monthly payment or total interest paid.
3. Choose a loan offer
Once you’ve reviewed (and hopefully prequalified for) several loan offers, you’ll be better equipped to choose the option that suits you best. The lender you choose to work with may let you select your preferred repayment terms as well.
A shorter loan term (e.g., five years) might help you secure a lower interest rate and pay off your debt faster. However, your monthly payment would likely be higher. If you extend the loan term, on the other hand, you could reduce the size of your monthly payments and make managing your budget easier. The trade-off would be more interest paid over the life of the loan and more time passing before you eliminate the debt.
4. Fill out an official loan application
Once you’ve narrowed down your preferred lender and loan offer, you must complete an official loan application. Even if you went through a lender’s prequalification process, you must complete this step before your loan can be approved.
At this point, the lender will likely run a hard credit inquiry to access your full credit report. The lender will also want additional information you didn’t include on your prequalification form. If you’re applying with a co-signer, you’ll need to provide their information as well.
You may need to provide the lender with copies of documents and information such as:
- Social Security number (SSN).
- Driver’s license or government ID.
- Loan payoff statements from existing student loan lenders or servicers.
- Proof of graduation.
- Proof of employment (pay stubs, W-2, etc.).
5. Sign your loan documents and start paying your new loan
Once approved for your loan, you’ll sign your loan documents. Technology has made this step considerably easier. Where you once had to sign loan documents in person or fax or mail them in, most student loan companies now handle their entire process online for ultimate convenience.
Once your documents are signed and filed, you will begin making payments on your new loan just like you were with your old one. However, your new lender may not pay off your former loans right away. Sometimes the process can take a few weeks. Continue making any student loan payments that come due in the meantime so you don’t face late fees or potentially negative credit reporting.
Once your student loan refinance is complete and the debt has been transferred, you should receive a payoff letter from your old lender. You will need to create an account login with your new loan servicing company and begin making payments on your refinanced loan. Keep an eye out for correspondence from the new lender identifying your first bill due date. Many lenders let you choose a date each month that works best for your schedule and budget, and some will offer a discounted rate if you enroll in autopay.
- Reviewing your credit scores before refinancing will help you understand where your credit stands and confirm that your reports are error-free.
- Take the time to check rates and fees with at least three separate lenders before you commit to a new loan.
- Look at your budget and overall financial picture to decide which loan terms make the most sense.
- Having your loan documents ready before you fill out your application to refinance will help the process go smoother and faster.
- After signing your loan documents, keep making payments on your old loans until the transfer officially goes through.
Should I refinance my student loan?
Refinancing a student loan could help you get out of debt sooner and possibly reduce your monthly payment obligations, but this hinges on whether you qualify for a good deal.
Before you decide to refinance your student loan, there are a few factors to consider:
- Type of loan: The type of loan you have may impact your options for refinancing. Refinancing can only be done through private lenders, so refinancing your federal loans means losing federal protections — like federal forbearance, income-driven repayment plans and more.
- Remaining time left: Refinancing into a longer repayment period could increase the overall amount of interest you’ll pay on your loan. If it is almost paid off, it could be cheaper to stick with the loan you already have. If you’re at the start of your repayment period, on the other hand, refinancing may not impact you as much.
- Current interest rate: Most people refinance to get a lower interest rate. Getting a lower rate means you could pay less interest over the loan term if you don’t stretch out your repayment term.
- Monthly payment: Refinancing is a good idea if you have an unmanageable monthly payment. Extending your repayment term may ultimately increase the interest you pay, but it will also lower your monthly bill.
When in doubt, use a student loan calculator to compare your current loan with any new loans you’re considering.
The bottom line
Refinancing your student loans can help you to save money on interest, shorten your repayment term or lower your monthly payments. Before starting the process of a student loan refinance, you will want to do your homework by checking your credit score and shopping for the best rate and terms. Once you have identified a new loan that suits your needs and budget, applying for a refinance can help you save money and achieve other long-term financial goals.
Frequently asked questions
In general, you’ll need to have a credit score in the mid- to high 600s, a debt-to-income ratio of less than 43 percent and a source of steady income to refinance a student loan, but the requirements vary by lender.
Getting prequalified is an excellent way to see if you’re eligible for student loan refinancing. While prequalification doesn’t guarantee that you’ll be approved, it can help you see if you meet the minimum criteria set by lenders.
Once you fill out a loan application and submit the required documentation, your refinance request could be approved within a few days or a few weeks.
You can refinance federal student loans, although you must do so with a private lender. This means that you’ll give up federal protections like deferment and forbearance, as well as access to benefits like income-driven repayment plans.
Some lenders allow you to transfer student loans to someone else. Some parents do this with loans they took out for their child’s education, transferring those loans to the adult child once they’re in the workforce. Keep in mind, though, that the loan will have new terms and new rates, which are based on the new borrower’s credit.
Many lenders refinance student loans for people with bad credit, although if a lender does accept a lower credit score, it will almost certainly offer higher rates. As with new student loans, you can often apply for refinancing with a creditworthy co-signer, which could help you get qualified if you have poor credit.
When you apply to a refinance lender, the resulting hard inquiry can knock a few points off your credit score. However, this impact is temporary and likely won’t do significant damage.
If you get approved, the resulting opening of the new loan account and closing of the original accounts can also temporarily impact your length of credit history, which is a factor in your credit score. Again, the impact is usually minor and temporary. Refinancing could improve your score in the long term if it helps you more consistently make payments on time and in full.