If you’re one of the 45 million Americans currently dealing with student loan debt, you may be looking for ways to relieve your monthly payment burden or pay off your loans faster. Student loan refinancing could help you accomplish both of those goals.
Refinancing your student loans could not only lower your interest rate but could also give you the opportunity to reduce or extend your payment terms. And it could also simplify your payments by enabling you to consolidate multiple loans into one.
How to refinance student loans
Think that 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 loan type
Before learning how to refinance your student loans, you’ll want to make sure that refinancing is right for you in the first place. With other types of loans (like mortgages or auto loans), it’s rarely a bad move to refinance if you can secure a loan with a better interest rate or terms.
And the same can be said for your student loans if they happen to be private student loans. But federal student loans are a completely different animal and will require more consideration.
When federal student loans are refinanced, they lose eligibility for federal benefits like Income-Driven Repayment (IDR) or forgiveness programs like Public Service Loan Forgiveness (PSLF) . And these changes are permanent. You can’t move private student loans back to federal student loans to regain eligibility for federal benefits down the road.
Also, it’s important to point out that the CARES Act is currently providing relief to borrowers by pausing 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’ll lose eligibility for these relief programs.
If you have private student loans, refinancing to a lower rate if you can is pretty much a no-brainer. But if you have federal student loans, you’ll want to think through the benefits that you’ll lose in the process and carefully weigh the pros and cons.
2. Check your credit score
While the Department of Education doesn’t check a student’s credit before issuing federal student loans, private lenders will want to see your credit score to gauge the likelihood that you’ll repay your loan.
Many student loan refinancing lenders have minimum credit requirements, often set at or around 650. In general, the higher your credit score, the lower the interest rate you’ll be offered. And a score in the high 700s or 800s is likely to qualify you for the lender’s best rates.
You’ll want to know your credit standing before you start the loan-shopping process. You can check your credit score for free using tools like Credit Karma or Credit Sesame or your full credit reports (once per week until April 2021) at AnnualCreditReport.com .
If you discover any errors on your credit reports, you’ll want to dispute and resolve them before you begin applying for refinancing.
3. Calculate your average interest rate
In order to accurately evaluate the value of a refinancing offer, you need to know how much interest you’re currently paying on all your loans. For example, let’s say you took out four student loans during 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 up the interest rates of each loan together and then divide by the number of loans. Here’s how the math would work out:
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 makes it easier to use a student loan calculator to see how much you’d save with the interest rate you’re being offered on a refinance loan.
4. Get pre-qualified quotes
Now that you know your credit score and the average interest rate of your student loans, it’s time to start the loan-shopping process.
Rather than requiring you to complete full loan applications, most refinancing lenders can give you a pre-qualified quote with only a soft credit inquiry. This is preferable because soft credit inquiries don’t affect your credit score. With many of the top lenders, you can visit their sites and have a pre-qualified quote in minutes.
If you’d like to compare pre-qualified quotes from multiple lenders at once, you can also use a lender marketplace like Credible or LendingTree . Both of these platforms work with many of the best student loan refinancing lenders and are completely free to use.
5. Compare loan offers
If more than one lender sends you a preliminary loan offer, you’ll want to compare each of your options carefully. Yes, the interest rate that each lender is offering will be important. But here are a few more factors you’ll want to consider:
Loan Terms : How long will you have you to repay the loan?
Type of interest rate : Is the interest rate fixed or variable?
Payment flexibility : Can you defer payments if you decide to go back to school? Can you apply for a hardship forbearance if you lose your job?
Loan discharge policies : Will the lender discharge your loan if you die or become totally disabled?
Fees : Are there application or origination fees? Are there any prepayment penalties?
You’ll also want to consider customer service. Will the lender service the loan themselves or outsource servicing to a third party? If they do outsource loan servicing, 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 you choose any lender, you’ll want to have clear answers to each of these questions. The lender with the lowest rate may not always be the best choice. Instead, look for the lender that offers the best blend of low interest rate with attractive terms and benefits.
6. Complete the full loan application
Once you’ve chosen the lender you’d like to work with, you can move forward with filling out their full application. Know that the loan underwriters will likely want to see a variety of documents during this step. Expect that you’ll need to prove your:
Identity by providing your driver’s license, birth certificate, or other government-issued ID
Address by providing utility bills, insurance documents, bank statements, etc.
Income by providing a pay stub from within the last 30 days and your most recent 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 pay-off number.” This will tell your new lender exactly how much money they’ll need to send to your lenders to pay off your existing balances.
Know that once you submit your full loan application, your lender will usually perform a hard inquiry on your credit report. This will ding your credit score a little. However, if you submit multiple loan applications within a short time span, the scoring models will typically view them as only one inquiry.
7. Receive loan approval
If everything goes well during the underwriting process, your lender will notify you to tell you that your loan application has been approved. That’s great news!
From this point, things will move quickly. Your new lender will pay off your existing loans and should instruct you where to direct your payments moving forward. You may also want to consider signing up for auto-pay, especially if it will qualify you for an interest rate discount with your lender.
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Author: Clint Proctor Source: Business Insider USA