Student loan refinancing is when you take out a new private student loan to repay one or more existing student loans. Borrowers may choose to refinance student loan debt in order to lower the interest rate, reduce their monthly payments or pay off debt faster.
Refinancing student loans can save you money during repayment, but it’s not a good strategy for everyone — particularly if you have federal student loans that are eligible for debt forgiveness programs and income-driven repayment plans. But if you have private student loans or if you don’t plan on using federal protections, then you may have decided that refinancing is the right move for your financial situation. If this sounds like you, follow this guide on how to refinance your student loan debt in five easy steps.
How to Refinance Student Loans
— Gather your financial information.
— Compare rates across multiple lenders.
— Choose the best loan offer for your situation.
— Formally apply through the refi lender.
— Start paying your new student loan.
[Read: Best Student Loan Consolidation and Refinance Companies.]
1. Gather Your Financial Information
Before you begin reaching out to student loan lenders, you’ll want to gather information about your existing student loan debt from your current loan servicer. You should also dig into your own finances so you can know what to expect when it comes to your eligibility as a loan applicant. Here’s what you’ll need:
— Outstanding student loan balance. Determine how much you need to borrow by adding up the balances of all the student loans you wish to refinance. Consolidating multiple student loans into one will leave you with a single monthly payment.
— Current student loan rate. You should aim to refinance to a lower interest rate in order to save money on your monthly payments and over the course of loan repayment. Since there are no fees to refinance student loans, the interest rate reflects the total cost of borrowing over time.
— Estimated loan payoff date. Extending your student loan repayment term can lower your monthly payments, but it will cost more in overall interest charges over the life 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 may be higher.
— Credit score and reports. Student loan lenders determine your eligibility and interest rate based on your credit score and debt-to-income 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 all 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 auto loan.
2. Compare Rates Across Multiple Lenders
When it’s time to refinance your student loan debt, it pays to shop around. Most student loan refinancing lenders let you get prequalified to check your estimated interest rate and repayment terms without negatively impacting your credit score. This means you can compare loan offers from several lenders to find the lowest possible interest rate for your situation.
If you don’t qualify for a lower student loan rate than what you’re currently paying, you might need to work on your credit score further 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 be equally responsible for repaying the debt, so it’s important to have a realistic repayment plan.
[READ: Should You Refinance Your Student Loans in 2022?]
3. Choose the Best Loan Offer for Your Situation
With multiple loan offers in hand, you can choose the one that best helps you meet 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 reduce your monthly payments and save money over time while honoring your original loan payoff date.
If possible, you can save even more money and pay off debt faster by opting for a shorter repayment term along with a lower rate. Still, make sure you’re prepared to handle the higher monthly payments of a more aggressive debt repayment plan.
You can use a student loan repayment calculator to estimate your new monthly student loan payments and potential lifetime savings.
4. Formally Apply Through the Refi Lender
Once you’ve chosen the best loan offer for your financial situation, you’ll need to fill out a formal loan application with the lender. Unlike with prequalification, the loan approval process will require a hard credit inquiry, 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 will look more closely through your full credit report. You may be asked to provide additional information and documentation about your employment, income and existing debts. You’ll also give the lender proof of identity, such as a Social Security number, driver’s license or another form of government identification.
Remember that prequalifying for a new student loan doesn’t necessarily guarantee that you’ll be approved. If the lender finds something during the underwriting process that wasn’t disclosed in your initial loan inquiry, your application may be denied.
[READ:Do Student Loans Count as Income?]
5. Start Paying Your New Student Loan
Upon loan approval, you’ll sign your loan documents — this step can typically be completed online. Your new student loan lender will pay off your existing debt, and your loan balance will be transferred within a few weeks. In the meantime, though, you should continue making payments to your original lender until the handoff is complete so that you’re not charged any late fees.
Once the transfer is finalized, you’ll start making payments to your new lender. Keep track of your repayment progress, and you’re one step closer to getting out of student loan debt.
More from U.S. News
How Student Loans Affect Your Credit
Survey: 43% of Parents Regret Borrowing Student Loans for Their Children
How to Get a Refund for Federal Student Loan Payments Made in Forbearance
How to Refinance Student Loans: The Complete Guide originally appeared on usnews.com
