Refinancing your existing student loans could potentially save you money over time. Besides the cost savings, people may also refinance their student loans to consolidate payments, giving them more “breathing room” if they incur major financial issues. Here’s what you need to know to get the best refinancing deal for you in 2020.
A possible benefit of refinancing student loans is the ability to save money. This occurs if you can lower your interest rate, or even shorten the amount of time you have to pay off the loan. This could mean thousands of dollars less in interest payments.
The latest research shows that nearly two-thirds of seniors that graduated from either a private or public college in 2018 had some form of student loan debt. The average was slightly over $29,000, a two percent increase over the previous year.
After graduation, most loan terms provide a grace period before you must begin making payments. For some, the terms you agreed to may no longer fit into your budget.
People usually refinance student loans for a few reasons:
Depending on market conditions and your situation, there are several factors to think about when considering if refinancing is your best option.
In this guide, we’ll explain:
To get the best deal when refinancing your student loans, you’ll need to do some research to understand your options. For starters, you must understand the details about your existing loans. Next, you should research refinancing offers from multiple loan companies. The process will most likely involve online loan applications and the need to gather loan payoff details on your existing loans. The lender you select for refinancing your student loans should offer some guidance for this process.Regardless of why you’re considering refinancing, understanding the terms of your existing and new loan is important. For example, are there any repayment penalties or origination costs?
Some of your student loans may carry higher interest rates. This applies to both federal and private student loans. When you took out these loans, you probably didn’t have much of a credit history. Lenders (including the federal government) offset taking a risk on borrowers with little or no credit history by charging a higher rate of interest.
However, after graduation and once you are gainfully employed, it’s much more likely that loan underwriters are able and willing to offer better terms, especially if you have built and maintained a good credit history.
Let’s say you have $80,000 left on your current student loan at a variable interest rate of 6.75% for eight years. If you refinance and convert this loan to a fixed rate of 5% and for the same length of time, you’ll save approximately $6,525.00.
Keep in mind that because your existing loan has a variable rate, the potential savings may vary depending on market conditions.
Lenders have gotten into big trouble for promising cost savings, which is another reason to understand the terms of any loan.
You won’t see detailed outlines of how much consumers save on loan websites, but you might find loan calculators that help make the impact clear.
To recap, how much you could save is based on many variables, including your:
While there are several advantages to refinancing your student loans, there may be a few reasons refinancing isn’t the best option now.
You should think hard before you refinance student loans if you:
You may not know if these categories apply to you until you start digging. That’s perfectly fine. Companies that refinance student loans want your business. They expect some applications that don’t meet their criteria. They also work with people every day who aren’t sure what to do about their finances. Take the time to do your research.
Unlike taking out loans during school – when there’s a set due date for tuition payments – refinancing student loans doesn’t come with a hard deadline. You can apply whenever it makes sense to do so. There are two main factors to assess before you start your search.
First: Your credit history. Experts say you start building a record with creditors within about six months of making your first financial transaction, but it can take years for you to develop a robust score. Make a mistake, and you’ll see your score dip. Common financial blunders include:
Every time something like this happens, your credit score will suffer. You’ll need to have periods (maybe even long periods) of keeping your credit performance strong to repair the damage. If you know your credit is lousy, wait before you think about refinancing.
To refinance student loans, a borrower typically needs a credit score in the high 600’s ; to get the best rate refinancing your student loans, you’ll need a credit score in the mid- to high-700s. That’s what’s known as “prime” or even “super prime” credit. Refinancing student loans involves a relatively steep hurdle for approval.
Next, underwriters will evaluate your “debt-to-income ratio.” As the term implies, this is a function of your salary and total debt payments. This is calculated as a ratio of your total monthly loan payments to your gross monthly income. We talked about loans in the first point above in terms of whether you have responsibly used credit. Here, the potential lender is interested in your total debt payments.
A lower total is better, of course. The income side is pretty straightforward: You want to have more than enough income to cover those debt payments. Lenders typically want to see a debt-to-income ratio that is no more than 30%, including payments on your refinanced student loans.
In addition to your income, lenders are also interested in your employment situation. Experts say it takes college graduates up to six months to find a job, and your first position may come with long hours and low pay. Loan companies want to see substantial paychecks, steady work, and opportunities for growth. These benefits usually come with career-track jobs, not temporary gigs. If you’ve just landed a position, and you get the sense you’ll be moving on to a better opportunity soon, consider waiting before you apply.
You’re not sure if you should refinance student loans, and just thinking about all your debt and the details makes your head hurt. A methodical approach can help you determine if you should move forward.
Prepare to refinance student loans by assessing your debt. Find out:
Then, gather your identifying information. You’ll need to tell loan companies your name, address, Social Security number, and other personal data. Some companies also ask interesting questions about your rental history, grocery bill, and seemingly unrelated issues.
With your data gathered, you’re ready to research loan companies.
Think of the student loan refinancing lender you select as your partner for the next several years. You’ll want to make the best decision you can, so you’re not unhappy in the partnership.
As you assess each company:
There are literally dozens of options when it comes to refinancing your student loans. Run a search on the internet, and you’ll get hit with a screenful of organizations all begging you to visit. But some are better than others.
These are a few of the companies you could consider:
In many cases, student loan debt can have a significant impact on your overall financial health. If you think refinancing may be right for you, but are unsure where to start, our experts at College Finance can help point you in the right direction. Browse our latest articles and guides for answers to any questions you may have about financing your college career.