While borrowers frequently refinance debt like mortgages or car loans, many people do not realize they can refinance student loans as well. Refinancing options are more accessible for borrowers than ever before and can give graduates the help they need to reduce their debt.
There are over 40 million people with student loan debt in the United States. With the average borrower owing $28,400 in student loans, many young professionals are looking for relief and could benefit from refinancing.
While most agree the possibility of lowering their interest rate or reducing their monthly payment is intriguing, there’s often questions about how the process works or who is eligible to refinance.
Here are four of the most common questions people have about refinancing student loans.
How Does Student Loan Refinancing Work?
With student loan refinancing, you take out a new student loan to pay off your existing student loans, simplifying your loans into one easy account and payment. The new loan typically has a lower interest rate and/or different repayment terms, helping you lower the total cost or monthly payment (or maybe both).
Over time, refinancing can save you thousands of dollars in interest over the life of your loans. For example, student loan interest rates can range as high as 12%. After refinancing, the interest rate may be as low as 3% depending on your qualifications and lender. The larger the gap is between your existing rate and your newly offered rate, the greater the potential is to save. Read more here to see why you might be offered a lower interest now than you were when you first took out your loans.
Use College Ave Student Loans’ calculator to see how much you can save by refinancing before you apply.
Who is Eligible for Student Loan Refinancing?
While refinancing your loans is often a smart decision, not everyone will qualify. Employment status and income are both criteria that many lenders consider when reviewing applications. Your debt must come from an accredited college or university, and some lenders only offer refinancing to graduates from particular schools.
Refinancing companies are looking for reliable borrowers with a strong credit history without any missed payments, a solid credit score, and a stable income. Most lenders have a minimum credit score in the high 600s, but to get the most competitive interest rates, your score will have to be even higher.
If your credit history is not strong enough or if your income is too small, you may still be able to qualify for refinancing if you have a cosigner. A cosigner is a parent, friend, or family member with an established credit history and income. By having them sign the loan with you, the lender is also considering their ability to repay when extending the credit.
TIP: When considering refinancing, evaluate the benefits of your current loans, especially federal student loans. Federal student loans offer benefits not commonly associated with private student loans that might be forfeited when refinancing.
What Do I Need to Refinance?
When you have decided that refinancing your student loan debt is right for you, you will need to do some preparation before you can choose a lender:
- Locate your tax return: Bring up a copy of your tax return so you have exact numbers for your total gross income and financial liabilities.
- Know Your Credit Score: Check your credit score via TransUnion, Experian, or Equifax so you know what interest rates you will qualify for.
- Identify a cosigner (if needed): If you don’t think you qualify by yourself or for a lower rate, find a reliable friend or family member who will be willing to cosign with you.
Some lenders require additional documentation when refinancing student loans. College Ave created a streamlined process so, in most cases, applicants don’t need to worry about uploading statements for all of their student loans.
What Terms Should I Look For?
With refinancing, you will likely get several different offers with different interest rates and repayment terms if you apply with multiple lenders.
Most refinancing companies offer repayment options that span 5, 10, or even 20 years. While paying off your debt as soon as possible is wise, if it is not financially viable, selecting a longer term can help reduce how much you pay each month. As your income increases, you can increase the monthly payment amount and get the debt paid down faster.
You will also have the opportunity to decide between a fixed or variable interest rate. While variable interest rates are often much lower—sometimes as low as 2% depending on the lender and your credit – they can fluctuate over time. A fixed rate, while higher, will stay the same for the entire term of your loan. A fixed rate gives you more stability and predictability.
Refinancing your student loan debt can be a smart way to save money, but it is a big decision that requires some forethought and planning. If you do decide to refinance, build a plan for what to do with the money you save to use it wisely and build a secure financial future.
Companies are starting to offer student loan repayment benefits as part of employee compensation packages. When job searching, be sure to look at the total benefits package.Continue Reading