Have you ever calculated the total amount you’ll owe in student loans? It can be daunting to consider. But a refinance can help shrink your total student loan obligation by reducing the interest you’ll pay on your loans.
What Is Student Loan Refinancing?
When you refinance student loans, you pay off your existing student loans by taking out a new loan in its place — ideally one with more appealing repayment terms and/or a lower interest rate.
Reasons to Refinance Student Loans
There are two ways you can refinance your student loans that will lower your total student loan obligation:
- Shortening your repayment term: Switching to a 10- or 15-year repayment term will help you get out of debt faster and typically comes with a lower interest rate; less interest will also accrue over the life of the loan.
- Getting a lower interest rate: Even a small difference in your interest rate can make a big difference when it comes to student loans. A 1% interest rate decrease is more than enough reason to consider a refi.
Eligibility for Student Loan Refinance
You should make sure you’re likely to qualify for a refinance before you apply for one. Lenders may consider your current income and debt-to-income ratio, credit score, job security, and repayment history. A strong credit score can also help you earn lower interest rates.
How to Prepare for a Student Loan Refinance
Before applying for a refinance, here are some suggested tips.
- Check Your Credit Score: One of the first things a lender will look at to determine loan terms is your credit score. A high credit score, ranging between good and excellent, will yield the best results.
- Don’t Apply Between Jobs: While it makes the most sense for you to renegotiate terms when you have greater financial need, including during unemployment, the circumstance can actually harm your chances. Refinancing often follows the same qualification guidelines as the initial loan, so proof of income and steady employment may be required for your refi as well.
- Bolster Your Income: Income plays an important part in refinancing approval. While stable employment is important, your total income is equally important. Not only does steady income show the ability to repay, but higher incomes can impact your DTI ratio resulting in potentially better interest rate opportunities, meaning you’ll pay less money in the end.
Consider Bringing on a Cosigner
If you’re struggling to secure a refi or have concerns about getting approved, you may want to speak with a lender to see if a qualified cosigner could improve your chances of approval. Adding a cosigner can help ensure that the loan will be paid and gives the lender an extra layer of security in deciding to lend to you.