Thinking about refinancing your student loans? If so, congratulations: You’re actively managing your college debt and looking for ways to pay student loans down faster. But don’t move forward just yet. Student loan refinancing is a big deal and requires some thought beforehand. If you’re interested in student loan refinancing, follow these steps to ensure you come out on top.
1. Weigh the pros and cons of refinancing
The first step you should take before refinancing your student loans is to sit down and carefully consider whether refinancing really is the best move.
When you refinance student loans, you do so through a private lender. So if you refinance federal student loans, they permanently become private loans once the refinancing process is complete. That might not be a big deal if you’re confident you can easily afford your payments over the next several years. But if you ever want to enroll in income-driven repayment, pursue certain forgiveness programs such as Public Service or any other federal forgiveness, or place your loans on federal deferment or forbearance, that won’t be possible.
After weighing the pros and cons, you might decide that you only want to refinance your private loans, or pursue another method of saving money altogether.
2. Figure out your budget
If you determine that refinancing is the best financial move, the next step is to figure out how much of your monthly budget can comfortably go toward paying off your student loan. After all, saving a ton of money on interest won’t matter much if you can’t keep up on the payments.
There’s no hard number when it comes to how much you should put toward debt repayment each month. However, popular budgeting systems such as the 50/20/30 rule say that you should allocate about 20% of your income to saving money and repaying debt. With this in mind, take a look at your monthly budget and calculate how much money you can afford to set aside for student loan payments while keeping up on all your other obligations such as rent, utilities, savings, etc.
3. Get your credit in good shape
When you apply for student loan refinancing, most lenders will look at your credit score to determine if you’re a good candidate for approval. But don’t worry – you don’t necessarily need to have perfect credit to qualify for refinancing. You do, however, need to have decent credit; most lenders consider that to be in the range of around 650-680.
It’s a good idea to check your credit score and find out if it’s in good shape. You can usually do this for free through your bank, credit card issuer, or a free service. If your credit score is low, take a few months to work on building it up by paying bills on time, paying down existing debt, and avoiding applying for any new credit. The better your credit score, the more likely it is you’ll qualify for the lowest interest rates and best terms.
4. Up your approval odds
In addition to your credit, there are other eligibility factors that lenders will consider when reviewing your application. For instance, they’ll want to see proof that you’ve had a steady job, or at least a job offer from a reputable company. Many also have a minimum income you need to meet. Additionally, lenders will look at your debt-to-income ratio (DTI) to determine whether you have enough room in your budget to take on the new payment.
It’s always a good idea to find out what the specific requirements of each lender are before applying, and then make sure your financial background matches those requirements. This will ensure you don’t waste time applying for refinancing when you won’t get approved.
5. Compare multiple offers
Finally, you might be excited to submit your application and get the refinancing process over with, but take your time and shop around for the best deal before signing the dotted line. Compare factors such as interest rate, fees, and other terms and conditions to ensure you’re saving as much money as possible. Refinancing should be win for you, too.