Refinancing with Earnest
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There are many times when student loan refinancing is a good idea. But, like all financial strategies, there are gray areas and risks. One of the biggest risks can occur when your income fluctuates.
Say you work on commission, are a freelancer, or starting a business. You most likely have an unreliable cash flow; some months that are better than others. You might find yourself asking, “Should I refinance my student loans right now – or is that not an option for someone like me?”
Let’s find out.
Are your student loans private or federal?
Before you can even consider refinancing, it’s important to know what type of student loans you have: private or federal.
Funded by the federal government, these loans have a great deal of repayment flexibility. They offer access to federal consolidation, various repayment plans, forgiveness options, and help for those facing financial hardship.
For example, someone experiencing financial hardship due to a fluctuating income can apply for forbearance, deferment, or income-driven repayment plans.
The idea of losing these benefits is one of the main reasons someone might not want to refinance federal loans. If you refinance federal loans, you will lose those benefits – you’ll be replacing your federal loans with a new, private loan.
Funded by private lenders, these loans don’t have the same hardship or forgiveness benefits as federal loans. Some lenders offer similar benefits, but they vary and aren’t guaranteed.
However, if you already have private student loans, you don’t have access to those benefits anyway. In that case, replacing one private student loan with another is a fairly low-risk proposition.
Refinancing student loans on a fluctuating income
Let’s say you know you want to refinance your student loans but you’re worried about approval. After all, income is an important factor in this process.
So, can you refinance student loans on a fluctuating income?
The answer is maybe. While income heavily dictates whether or not you’ll be approved, it’s not all that matters. Let’s look at some of the major factors that play into whether or not you’ll be approved for student loan refinancing:
1. Your annual income
While a fluctuating income can prove to be a challenge in getting approved for refinancing (or any other loan), it doesn’t have to be the end of the world. What you want to focus on isn’t the highs and lows of your month-to-month, but what that averages out to at the end of the year.
In figuring out that number, you might even realize that you earn more than you thought.
When you apply for refinancing, figure out the amount you can prove that you earn on an annual basis. If you’re worried that number isn’t high enough, consider taking on a side gig or two to give it a boost.
2. Your credit score
Another factor that will come into play is your credit score. Check your score for free to see where you stand. Here’s a snapshot of ranges to help you see where your score falls:
The higher your credit score range, the better your chances are for approval. And if you need to work on your score, pay down revolving debt like credit cards and always make on-time payments to give your score a boost.
3. Whether or not you have a cosigner
Finally, if your credit score and annual income aren’t enough to get approved, you can try refinancing with a cosigner.
This isn’t at all uncommon. In fact, the last time The Consumer Finance Protection Bureau (CFPB) reported on this, the number of private student loans with cosigners had risen to 90 percent.
If you know someone willing to do this for you and they have good income and credit, then that could greatly improve your chances of being approved for refinancing.
Questions to ask yourself before you refinance
The question of can you refinance student loans on a fluctuating income isn’t as important as asking yourself, “Should I refinance student loans on a fluctuating income?”
Again, this will depend on whether or not your loans are federal or private, as federal loan borrowers have more to lose if they refinance and then end up needing benefits that are no longer available to them.
Even if you can refinance your student loans, that doesn’t mean it’s the best idea for you. The answer will depend on how much risk you can reasonably absorb. Here are a few questions to ask yourself:
- Do you have a solid emergency fund?
- Do you have dependents relying on your income?
- Are the highs of your fluctuating income high enough to cover the low months?
- Are you comfortable forfeiting benefits such as federal income-driven repayment plans?
- Can you predict the trajectory of your income over the next few years?
- What’s your debt to income ratio?
- What percentage of income in your lowest-earning months is taken up by bills?
These questions are meant to frame your current financial situation. What you’re looking for when you think, “Should I refinance student loans?” is a picture of the health of your finances before you even consider refinancing.
For example, if you have a high debt-to-income ratio and a good portion of your income is going to bills, then refinancing federal student loans could present a great risk. If you hit a period in which you can’t afford to pay all your bills, you won’t have income-driven repayment plans to fall back on.
Ways to keep student loan refinancing low-risk
If your income fluctuates, it’s important to keep your refinance as low risk as possible. Here’s how:
- Choose a fixed interest rate, rather than a variable rate.
- Choose a longer repayment term so you can lower your monthly payments.
- Use your higher income months to build up your savings for lower income months.
These steps can ensure that you give your budget as much room as possible to account for months when your income dips. Remember, you will no longer have income-driven repayment plans to help if you hit a financial snag.
Whether your loans are federal or private, a lower interest rate is a huge advantage for you. It means more of your money can be used to pay off the debt – and can even help decrease your payments if you choose a longer repayment term.
You might notice when you apply that the offered variable rate is lower than the fixed rate. It could be tempting to jump on that but there’s no way to know if or when that rate will increase. There’s also no way to know how much that could increase your monthly payment.
With a fluctuating income, that might be too much of a risk to bear.
Finally, if you’re not sure you’re comfortable with refinancing due to your fluctuating income, just say no for now. You can always try again later if your income stabilizes or you save enough money to give yourself more of a buffer.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.98%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|