Interest rates have dropped and are at historic lows. Some student loan borrowers may want to consider refinancing student loans. The main goal of refinancing student loans is often to get a lower interest rate and save money. But sometimes the rates advertised aren’t necessarily what is offered. How do you get a low interest rate when refinancing student loans?
When it comes to personal finance, “the rich get richer” is more than just an aphorism – it’s a basic rule of economics. As a consumer acquires more capital and increases their financial standing, they gain access to more valuable opportunities.
Student loan refinancing is a great example of this. You start out with high rates and poor terms because your standing as a borrower is low. As you progress in your career and increase all the metrics that indicate financial stability, you can refinance to lower rates and better terms. With a decreased debt burden, you can then increase your financial standing even faster.
That’s why finding the best student loan refinance rate is so important. Here is how you can get a better interest rate when refinancing student loans. Keep in mind that refinancing federal student loans means a loss in many benefits that only federal loans offer. These include an option for potential loan forgiveness, possible widespread forgiveness, income-driven repayment plans, generous deferment options if you become unemployed or have an economic hardship, and an option to discharge loans for death or disability.
If you have decided that student loan refinance is right for you, check out our list of the best lenders to refinance student loans.
Use our Student Loan Refinancing Calculator to estimate how much you could lower your total and monthly loan payments by refinancing your student loans.
Improve Your Credit Score
Becoming a great candidate for student loan refinance means having a high salary and low debt-to-income ratio. The problem is, those factors may be out of your control.
One thing you have more control over is your credit score, which also plays an important role. If your score is below 700, take a few months to improve it before applying to refinance.
Check your annual credit report for free and report any errors.
Resolve to pay all your bills on time, especially credit cards, mortgage payments and your student loans.
You can ask your credit card companies for an increase in your credit limit. Just be sure that they can do this without a credit inquiry.
Use less than 30% of the available credit on your credit cards and don’t open any new loans or credit cards. Don’t close any accounts, especially long-standing cards.
Your bank or credit card company may provide a free look at your credit score. Once you’ve reached the 700 club, it’s time to refinance with a lender.
Apply with Multiple Lenders
Another secret to securing a solid interest rate on your student loan refinance is comparing rates and terms among multiple lenders. Every lender will calculate their own interest rates, so it pays to shop around for the best one.
Apply within a 30-day window. When you apply for a loan, it counts as a hard inquiry on your credit report and affects your credit score negatively. If you complete all the applications within a 30-day window, those hard inquiries will essentially count as one. Set aside an afternoon to fill out applications for every lender you’re interested in.
Credible is a great tool in searching for student loan refinance lenders. You can compare rates from multiple lenders at the same time. Splash Financial is a student loan refinance marketplace that matches you with a lender with a low interest rate.
Pick the Shortest Term
When you apply to refinance student loans, you’ll likely have a few different options to choose from. You’ll have to decide between a variable-rate loan and a fixed-rate loan, as well as a five-year or 10-year term.
If saving on interest matters the most to you, choose the loan with the lowest interest rate. That will probably be the loan with the smallest payoff term, usually five or seven years.
The downside to picking a shorter term is that the monthly payments will be higher. Depending on your job stability and other financial responsibilities, you may not want to sign up for a larger monthly payment. If you get laid off and can’t afford your student loan payments, you may wind up defaulting and tanking your credit score.
Those with a healthy emergency fund and no other significant debts can probably live with the trade-off, considering they’ll likely save thousands on interest over the lifetime of the loan.
Variable-rate loans often have a lower starting interest rate than a fixed-rate loan. The downside is that these rates are tied to the market, so they may increase if overall interest rates go up. If you prefer the predictability of having the same loan payment every month, go with a fixed-rate loan.
Improve your Debt-to-Income Ratio
If you can, try to pay off whatever debt you can. If you could wipe out a credit card, that means less debt you will paying every month. This will give you a better debt-to-income ratio.
If you have federal student loans, you can also enroll in an income-driven repayment plan or extended repayment plan to lower your monthly obligation.
Easier said than done, but you could also try to increase your income. If getting a raise or a better paying job isn’t possible, you can explore part-time jobs or side hustles to increase income.
Apply with a Cosigner
Applying with a responsible cosigner with great credit could also help you get a better interest rate. But it’s a lot to ask for someone to cosign for you. This means that are completely responsible.
At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.