Raise your hand if you’ve ever been personally victimized by high student loan payments. Us too. Refinancing might make you feel a little better. Think of it as a debt do-over, only this time you can save money instead of just borrowing it.
I’m awake now. How does it work?
Refinancing is when you get to say ‘bye’ to your old loan and ‘hi’ to a new one with terms you like better. That might mean finding a new lender that pays off the old one in full. Then you start paying the new guys every month...until you’re either out of debt or refinance again. It’s the circle of loan life.
Depending on the new loan and lender, refinancing can help you:
Get a lower interest rate. This means you’ll pay less over time.
Lock in an interest rate if you switch from a variable one to fixed. Fixed rates stay the same forever, no matter what the economy’s doing.
Pay less every month by extending the timeline.
Simplify your payments if you decide to consolidate and refinance multiple ones at once.
Exactly how much you can save depends on your personal stats. But you can plug them into this calculator for a better idea.
Sounds great. Is there a ‘but’ coming?
There are a few important things to know before refinancing. Like that there’s no such thing as refinancing with the federal gov. You have to use a private lender. So if you have federal student loans, you’ll be converting them to private.
That might not sound like a big deal. But it means you could lose out on certain perks that are just for people who owe Uncle Sam instead of a private bank. Such as being able to pick a repayment plan based on your income or qualify for public service loan forgiveness one day.
On the bright side, some private lenders offer flexible options, like freezing payments if you lose your job. It pays to do your homework before picking one.
Got it. Can anyone apply for refinancing?
Yes. But you aren’t guaranteed to qualify for the kind of terms you may want. Luckily, there are a few things that can help you stand out like the star you are.
Wow ’em with good credit. Lenders like to give money to people who’ve already proven that they’re financially responsible. Your credit score is a three-digit grade, typically ranging from 300-850, of how trustworthy you are to pay your bills on time and in full. Lenders generally want to see a credit score in the mid to high 600s when you’re applying for refinancing. The higher the better.
Show you’ve got a steady income. Lenders also prefer to give money to people with consistent paychecks who can afford to pay back their debt. Go figure. They’ll also be looking at something called ‘debt-to-income ratio.” Aka DTI.
It’s another way to gauge how easily you can afford debt payments because it calculates what portion of your income is spent on loans. The lower the better. Many lenders want to see a DTI somewhere in the 30% range. Others are more forgiving. Quick math lesson: That means that if you bring home $5,000 per month, no more than $1,500 goes toward debt.
Refinancing can be a good way to break up with high interest rates and high monthly payments. Terms vary a LOT by lender, so make sure you shop around. If you’re not ready to refinance yet, but might want to later, work on ways to make yourself more attractive to future lenders. If your credit score could use a little TLC, these pointers can help.