Refinancing your student loans can make a lot of financial sense. You could save thousands of dollars in interest and make managing your student loan payments a lot easier. For example, SoFi says that by refinancing, borrowers save around $14k on average.
But you shouldn’t rush into refinancing student loans without taking a few preliminary steps. Preparing now to refinance your student loans can save you from headaches later on, increase your eligibility, and improve your chances for getting approved.
Here are 6 steps to take before refinancing student loans.
1. Check the Eligibility Requirements
The first thing you should do before refinancing student loans is check the eligibility requirements for each lender. You want to make sure you fully understand their requirements and have read all of the fine print so that you don’t waste your time. For example, SoFi doesn’t offer refinancing for residents of Nevada.
Before applying, do your research and check out the eligibility requirements for all lenders. You can see some of the refinancing requirements listed here.
2. Calculate Your Savings
Refinancing your student loans has the potential to simplify your payments, but it can also get you a lower interest rate than the rates you have been paying. This is particularly true if you are in a better financial position now than when you had first taken out the loans.
However, this isn’t always going to be the case. It’s important to spend some time looking at what a lender will offer you versus what you already have.
If you have multiple loans, and only one has a high interest rate, it could be disadvantageous to consolidate all your students together to include loans with lower interest rates.
Spend some time with a student loan refinancing calculator and look over the fine print to make sure you’re considering a situation that will actually help you.
Choose a repayment term that works for you and helps you save money. Your monthly payments may be higher with a shorter repayment term, but you’ll save money on interest.
If you do choose a longer repayment term, make sure you’re comfortable with the tradeoff of extra interest charges in exchange for lower monthly payments.
3. Check Your Credit Score and Report
Before refinancing your student loans, do a check up on your credit score and credit report.
Your credit is what lenders look at to assess your creditworthiness — they want to know that you can pay back your loans in full and on time.
Start by checking out your free credit report at AnnualCreditReport.com. Your credit report offers a comprehensive view of your credit history, balances, and payment history. Look at it carefully to make sure everything is accurate.
In addition to your report, check your credit score. Your credit score is a numeric representation of your credit history.
Good credit scores generally tend to be at 700 or above, and most lenders require you to have a score in this range or above it. You can check your credit score for free on sites like Credit Karma or Credit Sesame.
4. Pay Down Credit Card Debt
If you’re also dealing with credit card debt, it makes sense to pay off as much as possible before refinancing your student loans. This is because it will affect your debt-to-income ratio (DTI), as well as your credit score.
Your debt-to-income ratio is one of the main ways that lenders can assess your viability as a borrower, so if you carry high balances on your credit card, it could affect your overall DTI.
In addition, carrying balances on a credit card will affect your credit utilization — or how much you borrow compared to your credit limit — which also affects your credit score. In general, it’s good to keep your balances at 30 percent or less of your credit limit.
Paying down credit card debt can benefit your overall DTI as well as your credit score, which could help improve your chances of getting approved for refinancing.
5. Gather Your Financial Documents
Lenders want to make sure you are legit and able to pay back your loan. As such, they will ask for various documents to assess your eligibility as a candidate. In order to help the application process move along seamlessly, you should gather your financial documents ahead of time.
Each lender will ask for different documents, but to prepare, gather your recent paystubs and your most recent tax return. In addition, create a document that has the following info:
- Your loan servicer’s information, including name, phone number, and address.
- A list of all your loans, including their balance and interest rate.
You’ll eventually need to grab your payoff statements from your current servicers, too, although this typically isn’t needed until after you’re approved for refinancing.
Having this information ahead of time can save you a headache down the line and prevent any delays on your application.
6. Look Into All Your Options
Refinancing student loans can make financial sense, but you want to look at all of your options before committing to refinancing. For example, if you work in the nonprofit sector you may be better off pursuing Public Service Loan Forgiveness.
When you refinance your federal student loans, you are giving up repayment options, including the options to defer payments or enroll in an income-driven repayment plan. Make sure to look into all your options and truly understand what you are going to be sacrificing before refinancing your student loans.
Keep in mind that you have various options when it comes to lenders for refinancing your student loans as well. Many borrowers shop around and apply to several lenders to get the best rates.
Refinancing can be a great option for many borrowers with federal and private student loans that have above-average interest rates. If you’re considering refinancing, use these steps to make the process easier and improve your chances of getting approved. Doing so can save you time and money.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
|2.56% - 7.40%||Undergrad & Graduate||Visit SoFi|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.58% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.80% - 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.54% - 6.65%||Undergrad & Graduate||Visit CommonBond|
|2.90% - 7.34%||Undergrad & Graduate||Visit Citizens|