7 steps to get the best deal
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- To refinance your student loans, start by checking your credit rating and calculating the average interest rate on your existing loans.
- Then check your prequalified rates with several refinance lenders and carefully compare loan offers.
- If you decide to go ahead with a lender, you will need to complete their entire loan application and provide all the necessary documents.
- After you receive loan approval, you will send the payments to your new lender. Consider signing up for automatic payment to make sure you don’t miss any payments.
- Learn more about obtaining or refinancing a student loan with CommonBond »
If you’re one of the 45 million Americans currently facing student debt, you may be looking for ways to ease the burden of your monthly payments or pay off your loans faster. Refinancing a student loan could help you achieve both of these goals.
Refinancing your student loans could not only lower your interest rate, but could also give you the option of lowering or extending your payment terms. And it could also simplify your payments by allowing you to consolidate multiple loans into one.
How to refinance student loans
Think Student Loan Refinancing is Right for You? Here are the questions you’ll want to ask and the steps you’ll need to take along the way.
1. Consider your type of loan
Before you learn how to refinance your student loans, you need to make sure that refinancing is right for you in the first place. With other types of loans (like mortgages or auto loans), it rarely makes sense to refinance if you can get a loan with a better interest rate or better terms.
And the same goes for your student loans if they are private student loans. But federal student loans are a whole different animal and will require more consideration.
When federal student loans are refinanced, they lose their eligibility for federal benefits like Income Based Refund (IDR) or forgiveness programs like Public Service Loan Discount (PSLF). And these changes are permanent. You can’t move private student loans back Federal student loans to regain eligibility for federal benefits down the road.
Also, it is important to emphasize that the The CARES Act currently grants relief to borrowers by suspending payments and temporarily setting the interest rate at 0% on federal student loans until September 30, 2020. But if you refinance your federal loans during that six month period, you will lose your eligibility for these programs. lightening.
If you have private student loans, refinancing at a lower rate if you can is pretty much a no-brainer. But if you have federal student loans, you’ll want to think about what benefits you’ll lose in the process, and carefully weigh the pros and cons.
2. Check your credit score
Although the Department of Education does not check a student’s credit before granting federal student loans, private lenders will want to see your credit score to gauge the likelihood of you paying off your loan.
Many student loan refinance lenders have minimum credit requirements, often set at or around 650. In general, the higher your credit score, the lower the interest rate you will be offered. And a score in the 700 or 800 is likely to qualify you for the best lender rates.
You will want to know your creditworthiness before you begin the loan purchase process. You can check your credit score for free using tools like Credit Karma or Sesame Credit or your complete credit reports (once a week until April 2021) at AnnualCreditReport.com.
If you discover any errors in your credit reports, you’ll want to challenge and solve them before you start to apply for refinancing.
3. Calculate your average interest rate
In order to accurately assess the value of a refinance offer, you need to know the amount of interest you are currently paying on all of your loans. For example, let’s say you took out four student loans while in college with the following interest rates:
- Student loan # 1: 4.5%
- Student loan # 2: 5.0%
- Student loan # 3: 6.5%
- Student loan # 4: 7.0%
To calculate your average interest rate, add the interest rates for each loan together, then divide by the number of loans. Here’s how the calculation would work:
4.5% + 5.0% + 6.5% + 7.0% = 22.5%
22.5% ÷ 4 (number of loans) = 5.625% (average interest rate)
Once you know your average interest rate, it’s easier to use a student loan calculator to see how much you would save with the interest rate you are offered on a refinance loan.
4. Obtain pre-qualified quotes
Now that you know your credit rating and your average student loan interest rate, it’s time to begin the loan research process.
Rather than forcing you to complete full loan applications, most refinance lenders can give you a pre-qualified quote with just a soft credit application. This is best because flexible credit applications do not affect your credit score. With many of the best lenders, you can visit their sites and get a pre-qualified quote in minutes.
If you want to compare prequalified quotes from multiple lenders at once, you can also use a lender marketplace like Credible or Loan tree. Both of these platforms work with many of the best student loan refinance lenders and are completely free.
5. Compare loan offers
If more than one lender sends you a preliminary loan offer, you will need to carefully compare each of your options. Yes, the interest rate offered by each lender will be important. But here are a few other factors you’ll want to consider:
- Loan conditions: How long will you have to repay the loan?
- Interest rate type: Is the interest rate fixed or variable?
- Payment flexibility: Can you defer payments if you decide to go back to school? Can you ask for forbearance from hardship if you lose your job?
- Loan discharge policies: Will the lender pay off your loan if you die or become totally disabled?
- Fresh: Are there any administration or origination fees? Are there early repayment penalties?
You will also want to consider customer service. Will the lender service the loan itself or outsource the service to a third party? If they outsource the loan department, do they still have an in-house customer service number? What kinds of things are their current customers saying about them on review platforms like Trustpilot?
Before choosing a lender, you’ll want to have clear answers to each of these questions. The lender with the lowest rate is not always the best choice. Instead, look for the lender who offers the best combination of low interest rates with attractive terms and benefits.
6. Fill out the complete loan application
Once you have chosen the lender you want to work with, you can continue to complete their full application. Be aware that underwriters will likely want to see a variety of documents during this step. Expect to have to prove your:
- Identity – by providing your driver’s license, birth certificate or any other government issued identity document
- Address – providing utility bills, insurance documents, bank statements, etc.
- Returned – by providing a pay stub for the last 30 days and your last tax return
Your lender will also need you to give them details about your existing loans. To speed up the underwriting process, ask your current lenders for your “10-day repayment number”. This will tell your new lender exactly how much money to send to your lenders to pay off your existing balances.
Be aware that after you submit your complete loan application, your lender will usually do a thorough investigation of your credit report. It will hurt your credit score a bit. However, if you submit multiple loan applications in a short period of time, the scoring models will generally consider them as one application.
7. Receive loan approval
If all goes well during the underwriting process, your lender will notify you that your loan application has been approved. This is good news!
From there, things will go quickly. Your new lender will pay off your existing loans and should tell you where to direct your payments in the future. You may also want to consider signing up for automatic payment, especially if it gives you a discount on the interest rate from your lender.