When it comes to refinancing student loans, the biggest obstacle most borrowers face is where and how to start. The hesitation about how to get started is not surprising. There are so many different aspects that go into refinancing student loans and every decision affects the outcome. This step-by-step on how to get started refinancing your student loan will walk you through the process and help you make the right decisions without getting overwhelmed.
#1. Understand How Refinancing Works & Its Pros And Cons
Rushing to refinance your student loans simply because everyone else is doing it is a bad idea. If you don’t understand how it works, there’s a higher chance of making wrong decisions that could push you further into debt.
Refinancing involves giving up your current loan to a new lender and taking out a new loan in its place. The new lender pays off your existing lender and draws up a new loan agreement with different terms and conditions, a different interest rate and a new loan term. After you’ve signed the new loan agreement and the funds are disbursed, you’ll start making monthly payments to the new lender.
The two biggest advantages of refinancing are the ability to change the terms of the loan and the potential to get a lower interest rate.
The only disadvantage of refinancing federal student loans is that the new loan won’t have any of the protections and benefits that came with the old loan. There are no disadvantages to refinancing private student loans. As long as you get a lower interest rate and better terms, it’s worth refinancing.
#2. Consider Your Goal For Refinancing
Your refinancing goal will guide all decisions you make with regard to monthly payments and the loan term.
For example, if your refinancing goal is to pay off your debt sooner, you can do this by choosing a shorter loan term. Keep in mind that a shorter loan term will mean increasing your monthly payments. Before choosing this option, you must make sure that you can afford the higher payments every month.
On the other hand, if your refinancing goal is to lower your monthly payments because you’re struggling financially, you’ll have to choose a longer loan term. You should know that while this will make the monthly payments more affordable, more interest will accrue over the long term. By the time you clear the debt, you will have paid much more in interest.
#3. Take Stock Of Your Loans & Decide Which Ones To Refinance
You don’t have to refinance all of your loans at one time if you don’t want to. You may want to hold on to your federal student loans for a little while longer if you think you may need the protections in the near future. This is especially important if you’re not earning a steady income or your finances are still shaky.
Another reason not to refinance a loan is if it’s almost paid off. Refinancing into a longer repayment period could increase the total interest you’ll pay on the loan, defeating the purpose of refinancing. In this case, it’s makes more financial sense to hold on to that loan.
When choosing loans to refinance, prioritize high-interest loans, private student loans, and those that have longer loan terms remaining.
#4. Check Your Credit Report & Credit Score
You’ll need to know your credit score at a later stage to determine whether or not you meet a lenders’ minimum score requirements. Why wait till then – if you check your score now you’ll have the information ready when you need it.
It’s also worth checking your credit report for errors that may be pulling your score down. Request your free credit report from AnnualCreditReport.com and go through it. If you spot any inaccuracies or incomplete entries that are hurting your score, file a dispute and ask to get it corrected. This will help boost your score by a few points, which could potentially help you snag a lower interest rate. Even a small drop in the rate can save you a significant amount in interest over the loan term. This is definitely something you should do before you apply for refinancing.
#5. Research Lenders’ Requirements
When researching a lender to refinance with, you want to look for one that’s offering the lowest interest rate and best overall terms. But first, you have to check their eligibility criteria.
Every lender sets their own eligibility criteria with regards to minimum credit score and loan amount. Some will only approve if you’ve completed your graduation.
Lenders will rarely compromise their criteria so if you don’t meet their minimum requirements, strike them off your shortlist. Only consider lenders whose refinancing criteria you meet. For example, if you haven’t graduated, your shortlist should only include lenders who don’t require a college degree for refinancing.
Once you’ve got this shortlist, go through each of the lenders featured on the list and compare interest rates and loan terms.
#6. Get Rate Estimates
As with refinancing requirements, every lender also sets their own interest rates, which are published on their website. The rate published on the site generally reflects the lowest interest rate the lender offers but it’s not necessarily the rate you’ll pay. Your rate will depend on your credit score and other financial credentials.
There are two ways to get your personalized rate estimates. One is by requesting each lender individually for a rate estimate. On receiving your request, the lender will check your credit score and give you a personalized interest rate quote. This can be hugely time-consuming as you’ll have to request each lender individually.
A faster way is to compare rates and terms from multiple student loan refinance lenders in one place. A quick glance through this page of top refinance lenders will give you a pretty good idea of what to expect from each lender. You can also click through to visit each lender’s website for more details and the application form. Ultimately, the best lender for you is one that offers you the lowest rate, favorable terms, and no hidden fees.
#7. Use A Student Loan Refinance Calculator To Choose The Best Terms
After identifying the best lender for you, there are a couple more decisions you have to make before applying for student loan refinance.
The first is whether to choose a fixed or variable rate. Right now, with interest rates being so low, it’s best to choose a fixed rate. This will lock in the low rate for the life of the loan and save you the most money in interest.
The second decision is regarding the loan term. Choosing a shorter term will save you the most in interest but it means increasing the monthly payments. Choosing a longer term will lower the monthly payments but increase the amount you’ll pay in accrued interest. Ideally, you want to choose a loan term that will save you the most money while still keeping the monthly payments affordable.
Don’t even try to calculate this manually. It could take days. The fastest way to determine the best term for you is to use a student loan refinance calculator. This online tool is free and easy to use. You just enter the loan amount and interest rate and the tool will calculate the monthly payments at different terms in less than a minute.
#8. Keep Supporting Documents Ready
All lenders will ask you to submit certain documents with your application. No lender will process your application without the supporting documents. You know you’re going to need them so save yourself the last minute stress and keep these documents ready ahead of time:
- Social Security number
- Government-issued ID or driver’s license
- Proof of employment in the form of 3 latest paystubs, W-2 form, and tax returns
- Loan payoff statements from current federal student loan servicers or private lenders
- Proof of graduation
If you’re applying for refinancing with a co-signer, you’ll need to submit their documentation too.
#9. Agree To A Hard Credit Pull And Apply For Refinancing
You’ve got everything you need and picked your lender. The last step is to agree to let the lender do a hard credit check. This gives them access to your official credit report. The lender will confirm your interest rate only after going through your credit history.
One important thing to know – a hard credit check will pull your score down by a few points. This is unavoidable. To avoid too much damage to your score, only agree to this when you’ve finalized your refinancing lender.
If you’re okay with the rate the lender quotes, go ahead and submit your application along with the supporting documents.
#10. Peruse The Final Agreement, Sign It, & Wait For Confirmation
Once you’ve submitted your refinance application, there’s nothing to do but wait for it to be processed. This could take a few days or a couple of weeks. The lender will draw up an agreement and send it to you to sign.
Make sure to read through the agreement carefully before signing it. Don’t skip the fine print. Look for hidden fees and other discrepancies. If you find anything that seems out of the ordinary, don’t hesitate to call the lender and get it clarified. They are obligated to answer all your questions and clarify all doubts. Sign the agreement only after you’re fully satisfied with all the terms.
While the application and approval process are going on, you must keep making payments on the loans you’ve given for refinancing. You’re still liable for the payments until such time that the approval process is completed and you receive formal notification about the new loan. If you stop making payments on your current loans prematurely, it will be considered missed payment and you’ll unnecessarily end up paying a late fee as well as interest.
Why Now Is The Best Time To Get Started Refinancing Your Student Loans
Don’t wait too long to get started with refinancing your student loan. Right now is a particularly good time to consider refinancing any type of loan because of the record low interest rates. If you refinance now, you’ll be able to lock in the lowest rate ever on your loan, saving you a substantial sum over the life of the loan. Implement the tips above and get started today!