How-to Refinance Student Loans Guide – Private & Federal Loans
No doubt you’ve heard how voluminous student loan debt has grown. It’s the number two debt carried among U.S. citizens – behind only mortgage debt.
Student loan debt is higher than both credit card and auto loan debt.
Student loan debt is referred to as a crisis and there’s good reason why. According to Make Lemonade, there are more than 44 million U.S. borrowers who collectively owe $1.5 trillion in student loan debt.
The burden is overwhelming considering student loan delinquency is currently 10.7% (90+ days delinquent). That means not only are borrowers feeling the burn, so are their credit scores. Borrowers need to laser-focus on getting current and fixing credit.
Many graduates end up paying higher rates than they could get from a private lender by refinancing federal and private loans. One way to avoid falling behind is to refinance student loans.
Here is how to start the process.
How-to refinance student loans Guide
The first thing to know is when you refinance student loans, you take out a new loan from a private lender to pay off one or more of your old loans. Both private and federal loans can be refinanced.
Quick benefits to refinance student loans:
- Get a lower interest rate on the new loan.
- Option to choose new repayment terms
- Pay off your debt faster
- Lower your monthly bills
- Remove a cosigner from your debt
- Combine multiple loans into one, simple repayment
- Switch to a new loan servicer with better customer service
1. Find a private lender to refinance student loans
The Department of Education does not refinance student loans. You have to go to private lenders like Penfed Credit Union or Commonbond to refinance student loans. Once you refinance student loans, you are no longer eligible for student loan forgiveness, public service loan forgiveness or income-driven repayment. If you’re relying on federal protections, then you should not refinance your federal student loans.
2. Know which student loans can be refinanced
Federal, private, and Parent PLUS student loans qualify for student loan refinancing. When you refinance student loans, all of your loans are consolidated into one easy monthly payment.
3. Make sure your credit score is 600 or above
Most lenders will require a credit score in the high 660 or higher to refinance student loans. If you don’t have a credit score in the high 600s, you may need a co-signer. The borrower and the cosigner will both be jointly liable for the new loan but that does not mean the co-signer must be responsible for the loan throughout the entire loan term. Once your credit score is strong enough, the co-signer can be released.
Student loan refinance lenders like PenFed allow borrowers to request a cosigner release after 12 months of consecutive, timely payments are made.
4. Find out your rate prior to completing an application
It’s best to go with a lender that will let you see your interest rate instantly with no impact to your credit scores. Based on your credit score, the lender will be able to present you with interest rate options. That gives you a chance to decide whether or not to go further in completing a full application.
During the application process, you’ll be asked about:
- Your existing loans
- Your income
- Personal contact details
- The degree you hold
- Your existing job
- Where you live, and
- Where you went to school.
Finding out your rate results in a soft-pull inquiry on your credit report which has no negative impact on credit scores while submitting a full application results in a hard-pull inquiry on your credit report.
5. Once pre-approved submit a full application and income documents
Completing a full application to refinance student loans is going to take a little work. You’ll need to gather the following documentation:
- Employment Income Verification: A paystub dated within the last 30 days.
- Self-Employment Income Verification: 1 and 2 of the previous two years of your federal income tax returns.
- Photo ID: A Driver’s License, Passport, or state-issued ID card.
- Payoff statements. Payoff Verification Statements from each existing servicer.
- Graduation verification: A copy or photo of your diploma or transcripts.
Submitting a full application to refinance student loans is also a great time to release cosigners from previous loans.
Why Refinance Student Loans?
Government student loans offer the same rates to all borrowers. This works for many students who may be unlikely to qualify for private student loans. However, the government does not refinance student loans to lower rates. Graduates could have steady careers and good credit but still have to pay the rate assigned by the government.
Unfortunately, there are no student loan refinance offers through the government. As a result, many graduates end up paying higher rates than they could get from a private lender by refinancing their federal loans. The opportunity to refinance student loans is a good option for borrowers that steady jobs and good credit scores.
Final thoughts on student loan refinancing
The bottom line is student loan refinancing can save you thousands of dollars, lower your rates, reduce your loan payments and help pay off your loans sooner.
Where to start researching lenders that refinance student loans
Traditional banks, to credit unions to online lenders offer student loan refinancing. Shop around and compare your offers. Be careful, shopping around can hurt your credit score unless you choose online lenders that pre-qualify you.
Several online lenders make it easy to get an instant rate quote with no impact on your credit score.
Start your search here: