How to refinance your student loans in 2023
Refinancing your student loans involves the taking of an additional loan to settle your current student debt. Similar to the consolidation process used with federal loan loans, refinancing could consolidate your current loans into one easy monthly payment with a possible less interest or better terms.
If you decide that this method is the right one for you, assess your credit score, look for the most competitive rates, and then apply to get a loan that fits your financial situation.
1. Check your credit
One of the first things a lender does when you apply for a refinance of your student loan is to check at least one credit report and your credit score. You should check your Equifax, TransUnion, and Experian reports regularly for errors or mistakes. The Fair Credit Reporting Act gives you the option to dispute inaccurate information in a credit report.
2. Compare prices to get the best deal
It is important to compare rates for student loans and check with several lenders in order to get the best deal. You should always shop around for rates when you are looking to get a new credit card or loan.
Compare rates and fees of lenders online. Take advantage of prequalification tools offered by lenders. These applications only require a soft inquiry into your credit report. Prequalification can give you an idea of the loan rates and terms that you may qualify for in case you refinance. This information can be used to determine if refinancing will result in a lower monthly payment or interest total.
3. Select a loan offer
You’ll have a better idea of what you want to do once you’ve looked at (and hopefully been prequalified for several) loan offers. You may be able to select the repayment terms you prefer from the lender.
You may be able to get a lower rate of interest and pay your debt quicker if you choose a shorter loan term. Your monthly payment will likely be higher. On the other hand, if you extend the loan period, you can reduce your monthly payment and make budgeting easier. In exchange, you would pay more interest over the course of the loan. It would also take longer to eliminate the debt.
4. Complete an official loan application
After you have narrowed down the lender you prefer and their loan offer, it’s time to fill out an official loan form. This step is required even if you have already completed a lender’s loan prequalification.
The lender will then likely perform a hard inquiry on your credit history to get a full report. You will be asked to provide additional information that you did not include in your prequalification application. You’ll also need to include the information of any co-signers if you are applying for a loan with them.
The lender may require copies of certain documents or information, such as:
- Social Security Number (SSN)
- The driver’s license or other government identification.
- Statements of loan payoff from current student loan servicers or lenders.
- Proof of graduation.
- Proof of employment is required (pay stubs and W-2s).
5. Sign the loan documents to begin paying off your new loan
Sign your loan documents once you have been approved. The technology has made it much easier to complete this step. Instead of having to sign documents in person, or by faxing or mailing them in, many student loan companies handle the entire process online.
As soon as your documents have been signed and filed you can begin to make payments on your new loan, just like with your previous one. Your new lender might not repay your previous loans immediately. The process can sometimes take several weeks. In the interim, continue to make any payments due on your student loans so that you do not face late fees and/or negative credit reporting.
Should I refinance my Student Loan?
You may be able to reduce your monthly payments and get out of debt faster if you refinance a student loan. However, this depends on whether you are eligible for a good offer.
There are several factors you should consider before refinancing your student loan:
- Refinancing options may be affected by the type of loan that you have. Private lenders are the only ones who can refinance federal loans. This means that you will lose federal protections, such as federal forbearance and income-driven repayment programs.
- The amount of time remaining: A refinance into a longer payment period may increase the total interest that you pay on your loan. It may be cheaper to keep the loan that you have if it’s almost paid. Refinancing is less of an issue if you are at the beginning of your repayment period.
- Interest rate: The majority of people refinance in order to obtain a lower rate. If you do not extend your repayment period, you can pay less in interest.
- If you find that your monthly payments are too high, refinancing may be the best option. If you extend your repayment period, your interest rate may increase but your monthly payment will decrease.
If you are unsure, compare your existing loan to any new loans that you may be considering using a student loan comparison calculator.
Who can get a refinance of student loans?
You’ll generally need a credit rating in the 600s to 700s, a ratio of debt to income of less than 43%, and a steady source of income to be able to refinance your student loan. However, the requirements will vary from lender to lender.
Prequalification is a great way to determine if you are eligible for refinancing your student loans. Prequalification does not guarantee approval, but it can show you if you meet the minimum criteria.
How long does refinancing a student loan take?
After you submit your loan application with the required documentation, it could take a couple of days or weeks for your refinance to be approved.
Refinance your federal student loans
Refinancing federal student loans is possible, but you will need to do it with a private lender. You’ll have to give up federal benefits such as deferment or forbearance as well as the ability to access income-driven repayment programs.
Can you borrow money in another person’s name for student loans?
Some lenders will allow you to transfer your student loan to another person. Parents who took out loans for their children’s education transfer those loans to them once the child is in the workplace. Remember that the loan’s terms and rates will change based on your child’s credit.
Can you refinance student loan debt with a bad credit rating?
Most lenders will refinance student loans for those with poor credit. However, if they do accept lower credit scores, the rates are almost always higher. You can apply for refinancing student loans with a co-signer who has good credit, just like you would with a new student loan. This could help you qualify if you are a person with bad credit.
Can refinancing your student loan hurt your credit rating?
The hard inquiry that results from a refinance application can lower your credit score by a few points. This impact is temporary, and won’t cause any significant damage.
The opening of a new account, and the closing of your original accounts, can temporarily affect your length of history of credit, which is an important factor in determining your credit score. The impact is temporary and usually minimal. If you are able to make your payments consistently on time and fully, refinancing may improve your credit score over the long run.