Student loan repayment is hard, but it tends to get easier as you go along. While it can be tough to make payments on an entry-level salary, every pay increase frees up a little more room in your budget.
There’s also a mental boost that comes with seeing your loan balance continue to decrease over time. What once seemed insurmountable now seems within reach, and you start looking for any way to speed up the process.
As you continue to pay on time each month, your credit score begins to increase. If it increases enough, you can refinance to a lower interest rate or a more relaxed payment schedule. Either way, you can now choose loan terms that better fit your financial strategy.
If you’re thinking about refinancing your student loans, here are some strategies to determine if it’s the right move – and to make sure you get the best rates.
Decide Which Loans to Refinance
Your student loans are likely split up into several smaller loans. You may have federal loans, private loans or both. The first step is to figure out which ones you want to refinance.
You don’t have to refinance all your loans. For example, if you have both private and federal loans, you can decide to only refinance your private loans.
You should be careful when refinancing federal loans. These loans have different benefits than private loans, such as income-based repayment plans, deferment and forbearance. Public Service Loan Forgiveness (PSLF) is also only available with federal loans. Private student loans and refinanced student loans also offer access to forbearance, but if you are taking advantage of the other benefits that federal loans offer, make sure you understand which programs you may be giving up if you decide to refinance.
There’s no way to undo refinancing federal loans, so make sure it’s worth it. You can always change your mind later, so it’s usually better to refinance any private loans before considering your federal loans.
To refinance with LendKey, you must generally have at least $5,000 in loans and a maximum of $125,000 for undergraduate loans, $175,000 for graduate degree loans and $300,000 for medical degrees.
Check Credit Score and Report
Before you apply with a lender, check your credit report at AnnualCreditReport.com. Normally, you can only check your credit report once a year for free with the three credit bureaus. Due to the COVID-19 pandemic, you can check it once a week for free until April 2021.
Check your credit report and look for any red marks. These may be late payments, defaulted loans or bills that have gone to collections. Some of these may be accurate, but it’s also common to find mistakes.
If you see a mistake, dispute it with the three credit bureaus – Experian, Equifax and TransUnion. It can take several weeks to clear up a mistake, so take action as soon as you notice it. Follow up with the credit bureaus regularly to see if the error has been removed, and make sure the error is removed from all three reports.
After you’ve viewed your credit report, check your credit score. You usually need a score of at least 660 or higher to qualify for refinancing. In general, those with higher credit scores will be offered lower interest rates.
LendKey also requires a salary of $24,000 or more. If your score or your income is lower, You should consider refinancing with a cosigner. A cosigner is someone who accepts legal responsibility for your student loans if you stop paying.
Lenders will usually offer a lower interest rate if you have a cosigner because they feel more secure that the loan will be repaid. This is usually a parent, but anyone can serve as a cosigner – provided they trust you enough to accept the responsibility.
Compare Rates and Terms
When you’re approved for refinancing through LendKey, you may see a variety of offers with different rates and terms. In general, a shorter term means a lower interest rate. A 10-year loan will almost always have a lower rate than a 15-year loan, for instance. While a longer-term loan will likely have a higher interest rate, it will provide a lower monthly payment. This could provide more immediate financial relief in the short-term.
Compare those monthly payments to your current ones, and consider how this change might affect your budget for better or worse. If you’re on an extended repayment plan right now, you may see higher monthly payments if you switch to a shorter term.
Some borrowers can afford to pay higher monthly payments to save money on interest. Look at your budget and see what you can afford. Consider how your finances may change in the next few years, like if you plan to buy a house, have kids or go back to school.
You can always pay more than the minimum, but you can’t pay less than the minimum. It may be worth having a higher interest rate and lower monthly payments to have more flexibility in your budget.
You can use this refinance calculator to see what your payments may look like. The final rates and terms may differ once you actually apply with a lender.
Choose Between a Variable-Rate or Fixed-Rate Loan
A fixed-rate loan will have the same monthly payment for the loan’s duration. A variable-rate loan will change, ranging from monthly to yearly to reflect the economy’s interest rate fluctuations. When you refinance student loans, you’ll have to decide between a variable-rate loan and a fixed-rate loan.
Variable-rate loans will usually start with a rate lower than the fixed-rate loan, but can increase to an interest rate higher than the fixed-rate loan.
See what the highest possible monthly payment will be with the variable-rate loan and compare that to your current budget. If you can’t afford that payment, you shouldn’t choose a variable-rate loan – unless you’re prepared to make drastic changes in your spending.
Check Interest Rates Regularly
You can refinance your student loans multiple times if rates change or if your credit score improves. If you see something in the news about interest rates dropping, you can check to see if refinancing makes sense. Some people find that refinancing student loans once a year makes sense.
Unlike refinancing a mortgage, there are usually few or no fees when refinancing student loans, so it doesn’t hurt to refinance often. When in doubt, you might as well run some numbers.
Zina Kumok (99 Posts)
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.