(Editor’s Note: GregoryBresiger.com welcomes a guest columnist who offers some effective strategies for one of the biggest problems facing young people: student debt.)
By Nate Matherson.
Got student loans? It’s nearly impossible to get a college degree these days without taking on student debt. In fact, six out of 10 students have student debt and the average amount of student debt is nearly $28,000.
If you’re struggling with your student loans or just hoping to pay off your debt quickly, you might wonder what you can do to make it easier. An effective strategy is refinancing student loans. However, in our research we’ve seen that most current college students and recent graduates are unaware of the refinancing process.
With student loan refinancing, you essentially take out a new loan to pay off your current loans. One can potentially get a new loan at a lower rate and over a different loan term, a great benefit. That reduces your monthly payment and helps save money on interest over the life of your loan. And, during the refinancing process debtors can go from variable rates to fixed interest rates.
What the Refinancing Process Looks Like
When it comes to refinancing, you’ll have to find a student loan provider willing to lend to you. But even if you have a great salary and a good FICO credit score, you might still struggle to get approved. At LendEDU, we conduct an annual survey looking at how difficult it is to have loans refinanced. The State of Student Loan Refinancing Report 2017 found that the average credit score for approved applicants was 764 and that 58% of applications were denied.
So, before you start applying to refinance your student loans, you might want to check your credit score and see if it’s up to snuff. Some companies may be more likely to refinance your loans if you have a lower score than others, but then the interest rate will likely be higher, which could eat into your savings.
But I Have Rotten Credit!
Wondering what the cut-off is? Most companies do require that your score be somewhere in the mid-600s. If you have a low credit score, you could improve it quickly by lowering the proportion of your credit card limits you’re currently using. The ideal range is to use 20% to 30% of available credit. You might pay it off quickly or ask for a credit limit increase. Another thing you could do is get someone with an established credit card account that is in good standing to add you as an authorized user on their card. This may give your credit score a boost since their card will show up on your account.
If you can’t increase your credit score quickly, you might want to get a co-signer. If you already have a co-signer on your current student loans, that person might also be willing to co-sign your refinanced student loans.
When it comes to applying the process is fairly simple. Many student loan refinance lenders have online applications to pre-approve you that take just a few minutes and only do a soft credit check. They then tell you whether you would be likely to get approved and what would be your interest rate.
Once pre-approved, you’ll have to send additional information and documents to the lender, a hard credit check will take place. Then you’re ready to sign up for the loan.
How Much Can You Save?
So, just how much are you likely to save? It will depend on your personal financial and credit situation. But let’s look at the data from our survey. The average interest rate after refinancing was 5.56% and the average amount refinanced was $66,453.
Let’s say that your current interest rate on your loans is 8% on a 10-year loan. By refinancing, your monthly payments would go from $806.26 to $723.17 and your total interest over the life of your loan would go from $30,297.99 to $20,327.03. That’s a significant savings!
Things to Consider Before Refinancing
Before you refinance, you’ll want to look at several factors that could affect your loan. For example, you will likely want to look for a fixed interest rate loan rather than a variable interest rate loan so that you can lock in low interest rates over the life of your loan since interest rates are expected to go up long term.
You’ll also want to consider the term length. While a longer term may mean you’ll pay less monthly, it may also likely mean that you’ll pay more interest over the loan’s life. Before you commit to a new loan, you might want to use a student loan calculator to review different scenarios.
Another thing is your co-signer. When you sign up for a new loan, he or she might appreciate a co-signer release. That’s when your co-signer can be taken off the loan if you make a certain number of on-time payments.
Finally, you must decide which loans to refinance. While you can refinance your private and federal student loans, you may lose a number of protections if you refinance federal student loans. For example, you would no longer qualify for income-based repayment programs or student loan forgiveness programs. You also might not qualify to have loans automatically discharged if you become disabled. Moreover, you may lose the ability to pause repayment or defer loans during financial difficulties.
That’s why many people refinance only private student loans. Of course, if you don’t expect to face financial difficulties and you want to pay back student loans quickly and at the lowest cost, refinancing all your student loans together makes sense. Everything depends on your personal financial situation!
Nate Matherson is the CEO/Co-founder of LendEDU. LendEDU helps consumers learn about and compare financial products.
