Student loan refinancing: the complete guide

Student loan refinancing involves taking out a new private student loan to pay off one or more existing student loans. Borrowers can choose to refinance their student loan to lower the interest rate, lower their monthly payments, or pay off their debt faster.

Refinancing student loans can save you money during repayment, but it’s not a good strategy for everyone, especially if you have federal student loans eligible for debt cancellation programs and income-based repayment plans. But if you have private student loans or don’t plan to use federal protections, you may have decided that refinancing is the right decision for your financial situation. If that sounds like you, follow this guide on how to refinance your student loan debt in five easy steps.

How to Refinance Student Loans

Before you start contacting student lenders, you’ll want to gather information about your existing student loan debt from your current loan officer. You should also dig into your own finances so you know what to expect regarding your eligibility as a loan applicant. Here is what you will need:

  • Outstanding student loan balance. Determine how much you need to borrow by adding together the balances of all the student loans you want to refinance. Consolidating multiple student loans into one will leave you with one monthly payment.
  • Current student loan rates. You should aim to refinance at a lower interest rate to save money on your monthly payments and during loan repayment. Since there are no fees to refinance student loans, the interest rate reflects the total cost of borrowing over time.
  • Estimated loan repayment date. Extending your student loan repayment term may lower your monthly payments, but it will cost more in overall interest charges over the term of the loan. On the other hand, shortening your repayment period will help you get out of debt faster and maximize your savings, but your monthly payments could be higher.
  • Credit score and reports. Student lenders determine your eligibility and interest rate based on your credit score and debt-to-equity ratio. If you have fair or bad credit, you may want to work on improving it before applying. You can request a free copy of your credit report from the three credit bureaus – Equifax, Experian and TransUnion – to find areas for improvement and dispute any errors.
  • Proof of income. Lenders may ask you to provide recent pay stubs and tax forms to verify your income and employment. Additionally, you should be able to provide proof of identity, as well as additional information on any existing debts you have, such as a mortgage or car loan.

When it’s time to refinance your student loan, it’s worth shopping around. Most student loan refinance lenders allow you to be prequalified to verify your estimated interest rate and repayment terms without negatively impacting your credit score. This means you can compare loan offers from multiple lenders to find the lowest possible interest rate for your situation.

If you don’t qualify for a lower student loan rate than you’re currently paying, you may need to work more on your credit score before refinancing. You may also be able to get a better interest rate by enlisting the help of a creditworthy co-signer, such as a trusted friend or relative. But keep in mind that your co-signer will also be responsible for paying off the debt, so it’s important to have a realistic repayment plan.

With several loan offers in hand, you can choose the one that best helps you achieve your financial goals. Ideally, you’ll want to choose the lender that offers the lowest interest rate without extending your repayment term. This can help you lower your monthly payments and save money over time while still meeting your original loan repayment date.

If possible, you can save even more money and pay off your debts faster by opting for a shorter repayment term and a lower rate. Still, make sure you’re prepared to handle the higher monthly payments of a more aggressive debt repayment plan.

Once you have chosen the best loan offer for your financial situation, you will need to complete a formal loan application with the lender. Unlike pre-qualification, the loan approval process will require a thorough credit investigation, which will have a temporary and somewhat minimal negative impact on your credit score.

During the application process, the lender will want more detailed information about your finances and take a closer look at your complete credit report. You may be asked to provide additional information and documentation about your employment, income and existing debts. You will also provide the lender with proof of identity, such as a social security number, driver’s license, or other form of government identification.

Remember that prequalifying for a new student loan does not necessarily guarantee that you will be approved. If the lender finds anything during the underwriting process that was not disclosed in your original loan application, your application may be denied.

Upon loan approval, you will sign your loan documents – this step can usually be done online. Your new student lender will pay off your existing debt and your loan balance will be transferred within a few weeks. In the meantime, however, you should continue to make payments to your original lender until the transfer is complete so you don’t have to pay late fees.

Once the transfer is finalized, you will begin making payments to your new lender. Keep track of your repayment progress and you’ll be on your way to getting out of student loan debt.

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