How to Refinance Student Loans: Complete Steps & Requirements

The steps involved in refinancing a student loan include deciding if this is right for you, checking qualifications and comparing potential lenders, getting rate estimates, choosing a loan and completing an application.

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Getting an education doesn’t have to be a money trap. Refinancing might be the solution if you’re looking for a way to get rid of your student loan debt faster.

When you refinance your student loans, you’re essentially getting a new loan to pay off your existing student loans. This option makes sense if you want to take advantage of lower interest rates, extended loan terms (with lower monthly payments) or lock in a fixed rate.

The downside is that if you have a combination of federal and private loans, getting a new private loan means you’ll have to give up federal loan protections, such as loan forgiveness.

Before you do so, determine if refinancing is the best course of action for you and follow the steps to help you make the best choice.

Key Takeaways

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Student loan refinancing is taking out a private loan that allows you to combine federal and private student loans into a single loan with a new (and hopefully, better) rate and terms.

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Student loan refinancing may help you get lower interest rates and longer repayment terms. Additionally, it can make debt repayment simpler and more convenient by having just one loan account to manage.

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Lenders vary in terms of their requirements for student loan refinancing. Generally they require a credit score of at least 650, a debt-to-income ratio of 50% or lower, proof of steady and sufficient income and a completed degree.

Requirements for Student Loan Refinancing

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    Degree Status

    Lenders typically offer student loan refinancing only to borrowers who’ve successfully completed a degree, although there are exceptions. Some lenders have more stringent requirements, such as graduating from a bachelor’s degree program or from a Title IV accredited school.

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    Credit Score

    Most lenders require a minimum credit score of 650 for you to be eligible for student loan refinancing. But having a higher score will increase your odds of approval and getting the lowest rates.

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    Income

    A minimum income of $24K is often required. Lenders will look for proof of regular and guaranteed income such as paystubs, 1099s for independent contracting, salary/employment certification letters, one or more years of W2s or tax returns and bank statements.

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    Debt-to-Income (DTI) Ratio

    A debt-to-income ratio under 50% is generally required, with most lenders considering a 20% DTI as excellent. A lower DTI signals to a lender that you have enough usable discretionary income to take on another financial obligation and are less likely to default.

Step 1: Determine if Refinancing Is Worth It

The average American has over $37K in student loan debts. Of the 45.3 million individuals who have student loan debt, at least half still owe $20K on outstanding loan balances two decades after graduation.

There are ways to escape being part of this statistic. One is by refinancing. Getting this type of loan makes perfect sense for certain types of borrowers, such as those who want to take advantage of a dip in interest rates and those who are seeking longer repayment terms to make monthly payments cheaper.

But there are also downsides to student loan refinancing. For instance, refinancing your federal student loan will make you ineligible for certain government programs and benefits, such as loan forgiveness, income-based repayments, deferment and forbearance options.

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HOW TO KNOW IF REFINANCING IS RIGHT FOR YOU

Refinancing may be ideal if you:

  • prefer to streamline your finances by consolidating your federal and private student loans into a single loan with one monthly payment that’s easier to manage.
  • have variable interest rates and prefer to switch to a more predictable, fixed rate.
  • have substantially improved your credit profile and want to get better rates.
  • want to pay off your debts earlier through a new loan with a shorter repayment term and lower interest rate.

Step 2: Check Your Qualifications

Applying for student loan refinancing can impact your credit score, so it’s best to check whether you meet the eligibility criteria before completing an application. Some lenders also have a pre-qualification process that will let you view the rates and terms before you apply.

Different lenders have different requirements, but in general, they’ll evaluate your creditworthiness by looking at your credit score. Most consider 650 a minimum but having a higher score (700 and above) could allow you to secure better interest rates. You may check your credit score from the loan statement issued by your bank, credit card or loan company. Alternatively, you may request a free copy of your credit report once a year from major credit reporting bureaus.

Other important factors that lenders will consider are your debt-to-income ratio, income and employment history and whether you completed your degree.

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HOW TO ASSESS YOUR FINANCIAL STATUS

Your financial status will change periodically as you move through different life stages. Assess if refinancing at this point is right for you by doing these:

  • Review the terms of your current student loan or loans.
  • Calculate the total current debts that you have.
  • Determine the monthly payments that you can easily afford on top of your other bills.
  • Consider any potential changes in your financial goals – for instance, if you want to free up more funds to start saving for retirement.

Step 3: Research & Compare Lenders

Given the same loan amount, lenders can still vary greatly on interest rates and repayment terms. Shopping around and comparing rates will help you find the best deals.

You’ll easily find lenders that offer student loan refinancing by searching online. Most lenders publish their interest rates on their websites. Alternatively, you could check if your bank or credit union offers this type of loan and at what rates.

Ideally, you should choose the lender with the lowest interest rates. But you must weigh this against the lender’s forbearance policies, reputation and service quality which are all important.

Ultimately, your goal is to find a lender that is aligned with your financial needsand will offer you the best rates and terms given your credit profile.

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TIPS FOR FINDING THE RIGHT LENDERS

These are helpful tips when selecting a lender:

  • Check if the lender offers lower rates than your current loan, as well as terms that are most important to you (forbearance policies, longer repayment, etc.).
  • Research the lender’s customer service reputation through trustworthy reviews and consumer forums.
  • Use a loan calculator to get an estimate of what you can easily afford in terms of monthly payments. The right lender for you will have loan payments that are within your budget.

Step 4: Get Rate Estimates From Lenders

Once you’ve identified the lenders that can deliver your needs, you can start narrowing down your choices. One factor that you can use to weed out inferior options is by getting actual rate estimates through pre-qualification.

Pre-qualification allows you to view the actual interest rates and repayment terms that the lender is willing to offer you. Equipped with this knowledge, you’re in a better position to decide whether to pursue a loan refinance application. Getting pre-qualified also expedites the loan approval process.

This process doesn’t impact your credit score because it only involves a soft credit inquiry, rather than a hard credit check which can cause a temporary lowering of your credit score.

To qualify for competitive rates, you could get a co-signer or consider reducing the balance on your other credit accounts like your credit cards to raise your credit score.

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COMPARING MULTIPLE RATE ESTIMATES

Below are some points to consider when comparing rate estimates.

  • Variable vs. Fixed Interest Rates: Lock in a fixed rate when interest rates dip.
  • Repayment Terms: Check how the length of repayment affects your interest rates.
  • Collateral: To convert your unsecured student loan to a secured loan (which requires collateral), you may take out a home equity loan or a cash-out home refinance.
  • Prepayment Penalties: Check if there are fees for paying off your loan early.

Step 5: Choose a Loan Offer

Your lender will send a loan offer that tells you the loan amount, interest rates and terms that it is willing to provide should you proceed with your application. If you applied to multiple lenders, you could compare the terms stated in their loan offers.

When choosing a loan offer, it’s important to study each lender’s loan amount, interest rate and APR, repayment term, monthly payment and fees.

If you’re like most borrowers, then much of your focus will be on rates and fees. People instinctively look for the most affordable options and rates give an accurate picture of the loan’s total cost throughout its lifetime.

Also, refinancing through certain secured loans (personal loans or personal lines of credit) will require collateral. If you’re not prepared to risk your assets, going for an unsecured type of loan might be better for you.

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HOW TO PICK A LOAN OFFER

Do these when picking a loan offer:

  • Write down the absolute essentials that you need from your student loan refinance. This list should include the loan amount, your preferred interest rate and repayment terms, the monthly payment that you can afford and whether you prefer to avoid paying extra fees (origination, prepayment, etc.).
  • Review each lender’s offer and check if it ticks the boxes on your list.
  • Pick the lender that best matches the items on your list.

Step 6: Complete the Loan Application

After you’ve decided that refinancing can help you crush your student debts faster, have checked that you meet the minimum qualifications and have chosen a lender that matches your needs and goals, it’s time to finalize the application.

You’ll still have to submit a full application even if you’re pre-qualified. At this stage, your lender may ask you to provide more personal and financial information and to submit additional supporting documents that weren’t required during pre-qualification. Your lender will also run a hard credit inquiry for a more thorough assessment of your financial capability.

Once your loan is approved, you’ll need to sign the loan’s final disclosure document. But if you change your mind, you’ll still have three days to cancel the loan.

Keep paying your current lender and only start paying the new lender upon receiving confirmation that the loan approval process is complete. Overpayments will be refunded.

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REQUIRED INFORMATION

Your final loan application will require you to provide the following:

  • A valid Government-issued ID.
  • Social Security number (SSN).
  • Payoff letter or current billing statement for each eligible student loan.
  • Proof of employment (such as recent pay stubs and W-2 form from the most recent tax year or tax returns if self-employed).
  • Proof of graduation.
  • Proof of residency.

Frequently Asked Questions About Student Loan Refinancing

You’ll find more information about student loan refinancing from MoneyGeek’s responses to some of the most frequently asked questions about this topic.

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