How To Prepare For Refinancing
Before you apply for student loan refinancing, do a quick financial audit and prepare some documents to help the process move along smoothly. Here are some steps to take to prepare for refinancing:
- List all your federal and private student loan totals.
- Write down your loans interest rates next to the total.
- Create a third column and include your loan servicers information, including phone, email and mailing address.
- Gather your most recent pay stubs.
- Collect last years tax return.
- Check your credit reports from the three major bureaus using AnnualCreditReport.com.
- Check your credit score for free at LendingTree.
Taking these steps can help you prepare to refinance your loans and have all your information in one place.
Help You Save For A Down Payment
If you refinance your student loans and decrease your monthly payment, you can use the extra cash flow to save for a down payment, moving expenses and closing costs.
Having a lower monthly payment on your student loans will also help after you buy the house because youâll have more money to cover any potential home repairs or remodeling projects.
Refinancing Parent Plus Loans
Though you took out the Parent PLUS loan for your dependant undergrad student together with your childs schooling benefits and overall financial aid package, that loan belongs to you past graduation. With 7% interest rates, its best to get it out of the way as fast as possible.
If you have good credit and can qualify for reasonable interest rates, refinancing your Parent PLUS loan can save you a bundle. Perhaps your child is now working and wants to help pay off the loan in their own name, or youre looking for a longer loan term and smaller monthly payment. Whatever the reason, its possible, and often very advantageous to get some refinance rate quotes and explore your options.
If you do choose to refinance your parent student loans, youll be replacing your government-backed loan with a loan from a private lender. This means that youll no longer qualify for income-based repayment plans or loan forgiveness. However since most Parent PLUS borrowers dont qualify for loan forgiveness , this may be perfectly fine for you. Check your balance, then check your refinance loan options.
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Deferment And Forbearance Protections
If you cant make payments on your federal student loans because youve lost your job, or for another reason like a medical issue, protections like deferment and forbearance can help.
Under both loan deferment and forbearance, you can temporarily suspend your payments until youre able to start making them again.
If you have subsidized loans, the federal government will pay interest on your loans during deferment and forbearance, which can be a big help. If you have unsubsidized loans, your interest will still accrue in most cases, adding to your overall loan amount.
Its also worth noting that some private lenders offer their own versions of deferment and forbearance benefits.
What Do I Need To Qualify For Student Loan Refinancing
The requirements to qualify for refinancing can vary by lender. However, there are a few common eligibility criteria youll likely come across, including:
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Good credit: Youll typically need good to excellent credit to qualify for refinancing a good credit score is usually considered to be 700 or higher. While some lenders offer refinancing for bad credit, these loans generally come with higher interest rates compared to good credit loans.
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Verifiable income: Some lenders have a minimum required income while others dont but in either case, youll likely need to provide documentation showing proof of income.
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Low debt-to-income ratio: Your debt-to-income ratio is the amount you owe in debt payments each month compared to your income. Lenders typically like to see a DTI ratio of 50% or below though keep in mind that some lenders might require lower ratios than this.
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Loan information: The lender will need information regarding each of the student loans you want to refinance, such as loan balances, your current lenders, and what schools you attended.
If youre struggling to get approved for refinancing on your own, consider applying with a cosigner to improve your chances. A cosigner simply needs to be someone with good credit such as a parent, other relative, or trusted friend whos willing to share responsibility for the loan.
Even if you dont need a cosigner to qualify, having one could get you a lower interest rate than youd get on your own.
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Simplify Managing Your Student Loans
Refinancing is a form of student loan consolidation. Your original student loans might be a combination of loans from multiple lenders. When you refinance student loans, the new lender streamlines your several loans into one loan. This means youll have a single monthly payment and one due date each month, which may reduce your chances of missing payments and paying late fees.
How To Choose A Refinance Parent Plus Lender
Each lender will have certain loan amount limits, from minimum amounts of $10,000 to $15,000, to maximum amounts as high as $300,000 to $500,000. If youve only got $7,000 in Parent PLUS loans, or if you have an exceptionally large amount, look for lenders that specifically state those numbers within their limits. Lenders will also only accept certain credit scores, so if youve got a fair or poor credit rating, it may be worth waiting a little and improving it . If it cant wait, some lenders will accept credit scores that others wont. You will also likely need a minimum income, ranging from $40,000 to $60,000, depending on the lender. Look around to find a lender with qualifications you know you can meet.
Take a look at the private refinance lenders flexibility. Will you be able to transition the loan to your childs name? Is there any allowance for deferment or delayed payment during hardship? Whats the procedure if you need to skip a payment? Some lenders have great benefits, knowing that sometimes we all just need a bit of leeway, but others are more strict on steady monthly payment. No matter what, youll need to pay back the loan, but a lender that works for you can make things significantly smoother when trouble hits.
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When Should You Refinance Government Loans
Reconsider refinancing federal student loans right now.
Even into next year, only refinance government loans if you’re comfortable with the risks involved. If you’re OK giving up federal loan benefits, refinancing student loans could offer long-term savings on high-interest federal loans.
For example, say you owed $30,000 with a 7% interest rate and 10 years on your repayment term. Refinancing at a 3% interest rate roughly the best you could expect would save you close to $7,000.
To qualify, youll typically need good credit and a debt-to-income ratio less than 50%. If you wait to refinance, work to exceed those benchmarks to get the best deal possible when you do apply.
Should You Refinance Federal Student Loans
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Student loan refinancing rates are low right now. But you should probably wait to take advantage of them if you have federal student loans.
Refinancing with a private lender costs you access to government programs. That includes the student loan relief being offered due to the coronavirus pandemic.
Some refinance lenders are currently instructing borrowers to think hard before refinancing federal loans. You should likely consider that a giant, blinking “caution” sign to hold off on refinancing these loans for now. The interest-free payment pause on all federal student loans has been extended until as late as summer 2023. In addition, President Biden recently announced his plan to cancel up to $20,000 in federal student loan debt per eligible borrower.
If you have private student loans, refinancing remains a good option if you can lower your interest rate.
For federal loans, we recommend that you use the time that student loan relief programs buy you to get your financial house in the best shape possible. Build an emergency fund. Pay off higher-rate debts. Improve your credit score.
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You Want To Change Your Repayment Term
Generally, the only way to adjust your repayment term is to refinance into a new loan. Extending your repayment term typically reduces your monthly payment, making it easier to achieve other financial goals like opening a business, starting a family or buying a house.
However, extending your loan term also means youâll likely pay more in interest over the life of your loan. Your interest rate may also increase when you extend your repayment term, as longer term loans usually carry higher rates.
When To Refinance Your Student Loans
The most appealing reason to refinance your student loans is to qualify for a lower interest rate, which will save you money over the life of the loan. Lenders base your interest rate on your perceived level of risk for repaying the loan. You may be a great candidate for a lower interest rate if your credit score has improved or if your income has increased since you signed on for your existing loan.
Check and compare rates from multiple lenders to ensure you are receiving the lowest interest rate available before jumping into a new loan.
If your financial situation has changed since you took on your student loans, or even since the last time you chose to refinance, refinancing your student loans can lower your monthly payments and free up additional disposable income. Those extra funds can be used to pay off other debts or simply to meet your current financial obligations. If you are struggling, refinancing may be your answer.
You can also use student loan refinancing to consolidate your student loans. Student loan consolidation takes multiple existing loans and rolls them into one single loan. This streamlines the repayment process by giving you one monthly payment to remember instead of juggling multiple payments and lenders.
However, this shouldnt be your primary reason for consolidating your loans. Only consider consolidation if you can also score a lower interest or better loan terms in addition to consolidating.
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What’s The Debt Avalanche Method
You may have heard the term “Debt Avalanche” when looking at ways to pay off your loans. What is the Debt Avalanche, and how does it work?
Debt Avalanche Explained
When you take a look at your loans, you’ll see that they all charge different interest rates. Credit cards, for example, are notorious for charging high interest rates – some even charge 20% or more!
Loans with higher interest rates charge you more for the money that you’ve borrowed. Wouldn’t it be great to pay off those more expensive loans first, and save that money?
That’s the idea
That’s the idea behind the Debt Avalanche. With this method, you make the minimum payment on all your loans, but put anything extra that you have into the payment on the loan with the highest interest rate.
Once that loan is paid off, congratulations! You’re one step closer to being loan-free. Then, take the money that you were paying on that loan, and add it to your monthly payment on the loan with the next highest interest rate.
That’s why they call this the “Debt Avalanche”. The money that you save by paying off the most expensive loans first, gets added into the payment on your next loan.
You would pay the minimum on the furniture store’s card, because they’re not charging you any fees for the money you’ve borrowed. Then, you would put your extra cash into the payment for the other credit card, since they’re charging you a lot of money each month.
Another approach
Why would you get a consolidated loan?
How To Choose The Best Lender To Refinance With
Once you think you’re ready to refinance your student loans, use loan marketplaces like Credible to compare lenders’ rates and loan terms. You’ll also want to consider their fees and any special payment protections they offer.
Select analyzed and compared private student loan funding from national banks, credit unions and online lenders to rank the best options for borrowers. We rated our top student loan refinance companies and all offer low refinancing rates, flexible loan terms, no upfront origination fee for refinancing or early payoff penalties, financial hardship protection plus co-signer options if the direct borrower does not meet the income and/or credit requirements to refinance on their own.
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Private Student Loans Do Not Offer Income
If you have federal student loans, you could qualify to have your loans put on an income-driven repayment plan. This ties your monthly payment to a percentage of your income. Private student loans arent eligible for income-driven repayment plans. If you refinance a federal loan into a new private loan, you no longer have this option.
Can Refinancing Help Me Pay Off My Debt Faster
Another way to save money in the long run is to refinance to a lower rate but keep paying the same amount for month. Youll pay off the loan faster and pay less total interest. In the above scenario, for example, paying $485.31 a month at 5% would cut the payoff time down to 8.5 years and only $9,105 would go toward interest.
Alternatively, even if you cant find a lower rate, its also possible to lower monthly payments by refinancing for a longer repayment time. Beware extending the repayment time to lower payments means paying more in interest in the long run.
But it could also be a way to make ends meet.
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Hold Off On Refinancing Student Loans If
- You’re going after student loan forgiveness. The federal government has a few student loan forgiveness programs, including Public Service Loan Forgiveness and the Biden administration’s large-scale forgiveness. When you refinance, you’ll be ineligible for these programs. The federal government doesn’t offer student loan refinancing, so you’ll have to go with a private lender.
- You want an Income-Based Repayment plan.These plans are available through the federal government and take your particular income and family size into account when calculating monthly payments, and could reduce them to as little as $0 per month. Private loans don’t have this option.
- You’ll end up with a higher interest rate than the one you currently have. This might go without saying, but if refinancing your loan will leave you with a higher interest rate, it’s not a good idea.
- You’re currently behind on payments. Your payment history makes up a significant part of your credit score, so the score will be significantly lower if you can’t make your payments now. A low credit score will make it harder to get a good interest rate on your loan.
Whether or not you choose to refinance your student loan, consider seeking financial counseling before making a decision. A knowledgeable expert can help you make the best decision for your specific situation.
Federal Direct Consolidation Loan
If you have federal student loans, you have the option to combine all or some of your federal student loans into a federal Direct Loan Consolidation. This option is only available to consolidate federal student loans, such as commercially-held Federal Family Education Loans . You cannot consolidate private student loans into federal Direct Consolidation Loans.
Direct Loan consolidation can give you access to protections and benefits available on Direct Loans, such as Public Service Loan Forgiveness , which can eliminate the balance of your Direct Loans after 120 qualifying payments . If you consolidate before May 1, 2023, you can also benefit from one-time increases to the number of payments that are considered qualifying for forgiveness under PSLF and Income-Driven Repayment , which provides for forgiveness of remaining loan balances after 20 or 25 years. PSLF and the enhanced payment credits are not available for commercially-held FFEL.
Federal loan consolidation will not lower your interest rate. The fixed interest rate for a Direct Consolidation Loan is the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will lock you into a fixed interest rate, so your new payment, if based on a standard repayment plan, wont change over time.
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Con: You Wont Qualify For Loan Forgiveness Programs
Federal loan borrowers are eligible for loan forgiveness programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness. But once you refinance your federal loans, youre no longer eligible for federal forgiveness programs.
During his run for office, President Joe Biden supported $10,000 of federal loan forgiveness per borrower. While there hasnt been any update on this proposal, its important to note that widespread loan forgiveness would likely only apply to federal loans, not private ones. If you refinance your federal loans and a loan forgiveness measure is passed, you could miss out on that benefit.
Select The Right Loan
After youve received options from at least three lenders, dive into the details. Youll want to familiarize yourself with the terms and conditions of the new loans and all the fees or clauses associated with them. Remember to look for early pay-off penalties and any stipulations on refinancing. Knowing these details can save you a great deal of frustration down the road.
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