How To Refinance Student Loans And Get Approved
Refinancing student loans comes with many benefits: a lower interest rate, a lower monthly payment, a single combined loan and the opportunity to pay off your student loans faster.
Here’s how you can increase your chances to get approved to refinance student loans.
Step 1: Focus on these key metrics
Student loan refinancing is an excellent tool to help lessen the financial burden of student loan repayment.
However, getting approved for student loan refinancing is not guaranteed. Why? While the federal government issues student loans, the federal government does not refinance student loans. Therefore, if you want to refinance student loans, you have to refinance only with a private lender.
Each private lender has its own eligibility criteria, underwriting requirements and approval processes. If one lender denies your application, the good news is that you can still apply to another lender – or reapply to the same lender – to obtain approval.
Sufficient Income: You need to have stable and recurring income to get approved for student loan refinancing. If you are unemployed or have low income, lenders may question your ability to meet your monthly life expenses, including debt obligations such as student loan payments.
Low Debt/Income Ratio: This ratio is expressed as a percentage, and measures the amount of your monthly debt payments as a percentage of your monthly income. Lenders understand that you may have other debt obligations such as a mortgage, but they want to make sure you can pay your student loan debt, other debt and life expenses. The lower, the better.
Work Experience: Many lenders want to ensure that you have stable employment, or at least a written job offer. This means that it can be difficult to refinance your student loans while you are unemployed, a student or a recent college graduate without sufficient work experience. However, some lenders will refinance student loans for medical residents or third year law school students with a written job offer, for example.
Good Credit Score: Lenders want you to demonstrate a history of financial responsibility. Your credit score is one way to measure your financial health. If your credit score is too low, you may be ineligible to refinance student loans. That’s why most lenders require a minimum credit score in the mid 600’s.
Step 2: Apply to multiple lenders
Applying to refinance student loans is like applying to college or graduate school: don’t just apply to one lender. Apply to multiple lenders to maximize your chances for approval.
A rejection from one lender does not preclude you from receiving approval from another lender. Remember that each lender has its own eligibility and underwriting criteria. Therefore, you should apply to multiple lenders to increase your chances for approval and to find the lowest rate on your student loans.
You can check your new interest rate in two minutes for free and with only a soft credit check, which will not hurt your credit score.
If you apply to multiple lenders within 30 days, typically this is treated as a single inquiry on your credit report.
Step 3: Get A Qualified Co-Signer
Ask your spouse, parent, grandparent or someone else close to you to act as a co-signer for your student loans. Your co-signer needs to have a strong credit profile and income, and be willing to be equally responsible with you for your student loan.
Having a qualified co-signer can make the difference between “approved” and “denied” – and help you get a lower interest rate.
The good news for your co-signer is that after you are approved to refinance your student loans, many student loan lenders offer a co-signer release, which releases your co-signer of financial responsibility if you can meet certain qualifications.
Step 4: Consolidate Other Debt
If you have outstanding debt, you should consolidate your debt into a lower interest rate loan.
Why? When you consolidate credit card debt, for example, you can improve your credit utilization and switch from variable debt to installment loan debt. This financial hack can improve your credit score.
For example, if you have outstanding credit card debt, you should consider debt consolidation with a personal loan to lower your interest rate. You may be able to cut your current credit card interest rate in half with a personal loan.
Step 5: Pay Off Debt
Lenders will evaluate your current debt-to-income ratio. One way to improve this ratio is to lower your debt burden. (The other is to increase your income).
Your debt-to-income ratio is driven by two factors: debt and income. If you lower your debt or increase your income (or preferably both), you will improve your debt-to-income ratio.
If you want to pay off debt and reduce principal, avoid income repayment plans, which can increase your interest payments over time. Your goal is to reduce your loan principal so that your monthly payments decrease.
Also, since student loans have no prepayment penalties, you can use a student loan prepayment calculator or lump-sum student loan calculator to pay off your student loans faster.
Step 6. Use a student loan refinance calculator
Want to know how much money you can save through student loan refinance?
This student loan refinancing calculator shows you how much money you can save compared to your current student loans.
Let’s assume that you have $50,000 of student loans at an 8% interest rate and standard 10-year repayment plan. Now, let’s assume you can refinance those student loans to a 3% interest rate.
You would lower your monthly student loan payment by $124 per month and save $14,860 over the life of your student loan.
When you combine all these steps, you will be on a path to savings before you know it.