If you’ve ever felt stuck paying tons of interest on your student loan, you’ve probably wondered if it’s possible to lower your interest rate. Although federal student loans have fixed interest rates, through student loan refinancing, you can potentially get a lower rate, meaning less interest and more savings.
But can you refinance student loans? Well, that depends on your eligibility. In this quick guide, we’ll cover what you need to know about student loan refinancing and how to boost your eligibility.
5 refinancing factors that determine your eligibility
There are various student loan refinancing companies out there. Each one has different eligibility requirements but generally, consider the same factors when evaluating if you’re a good candidate for a refinancing loan. So can you refinance student loans?
Check out these eligibility factors to consider first.
1. Credit score
Student loan refinancing companies are private lenders. As such, they have a vested interest in making sure they get paid back on the loans they give out. One way to evaluate that risk is by checking your credit score.
Like it or not, that three-digit number tells lenders a lot about your financial habits. Your credit score is a snapshot of your “creditworthiness”, and helps lenders understand how likely you’ll pay back your loans on time and whether you’re a responsible borrower.
Typically, a “good” credit score is 700 or above. If your credit score is not-so-hot, you might want to hold off on refinancing for now. Instead, work on boosting your credit score by paying off your balances each month and paying them off in full. If you have revolving credit, keep those balances below 30 percent of your credit limit.
Payment history and credit utilization make up 65% percent of your credit score so taking these two steps can help if you’re working to improve your credit.
You can check AnnualCreditReport.com to check your credit report which is used when determining your credit score.
Make sure the info is correct and if not, you can dispute the errors with the credit bureaus. You can check your credit score for free at Credit Karma or Credit Sesame. Your bank might also give you access to your FICO credit score. Knowing where you’re at can help you gauge your eligibility to refinance your student loan.
2. Debt-to-income ratio
Another factor to look at is your debt-to-income (DTI) ratio. According to the Consumer Financial Protection Bureau, “Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.”
Lenders want to know whether you can actually afford to take on a refinancing loan. To figure out your DTI, add up your total monthly payments toward debt. Then divide that number by your gross monthly income.
The lower your DTI, the better. While this is often used when applying for a mortgage, other lenders can evaluate this number as well. Generally, a good DTI is 35% or less, but this guideline varies by lender.
If your DTI is on the high side, increase your income and pay down more debt to improve your ratio. Working on this before applying for student loan refinancing may boost your odds for approval.
What do you need to pay back a loan? An income. While that may seem obvious, lenders want to know that the amount of your income can actually support taking on a refinancing loan.
True story: I got rejected for student loan refinancing when I was making $30,000 per year and still had $30,000 on my student loans. I probably wasn’t an ideal candidate, because I wanted to borrow the exact amount of money I earned in a year.
Student loan refinancing companies will want to verify your income so they have assurance you can afford the loan.
As private lenders, student loan refinance companies don’t offer as much wiggle room when it comes to repayment as federal loans. For example, you have federal student loans and lost your job or are looking for employment, you could go on an income-driven plan or go on deferment.
There’s less flexibility with refinancing companies. In order to get approved, they want to know you have stable employment. In some cases, they may look at your employment history as a factor in the review process.
If you’re in-between jobs or just started a new job you might want to wait until you have some time under your belt before refinancing.
You might be curious if you can refinance student loans while in school. Many student loan refinancing companies require that you’ve completed your degree before refinancing. So if you’re still in school and want to lock in a lower rate, you’ll have to wait. Consider giving it six to twelve months after graduation to apply for student loan refinancing.
When it makes sense to refinance student loans
If you’re thinking of refinancing but not sure if it’s the right fit, here are some guidelines on when refinancing makes sense:
- You’re not interested in Public Service Loan Forgiveness (PSLF)
- You have a stable job and income
- You have good credit
- You have completed school
- You’re not struggling to make payments
- You have a healthy DTI
In these cases, check out your prospective rate with various student loan refinancing companies to get started.
When to hold off on refinancing
Refinancing can save you money, but it also means giving up federal benefits. If you aren’t sure about your career path, or you’re considering student loan forgiveness or PSLF, hold off on refinancing for now. If there’s any possibility that you’ll work in the public sector, it doesn’t make sense to give up that option.
Also, if you’re struggling to make payments or your income is low, it’s in your best interest to keep your federal protections and opt for an income-driven repayment plan.
Borrowers who have poor credit should hold off for now while working to boost their score. In some cases, it makes sense to hold off on refinancing altogether (like if you’re close paying off your original student loans). In other cases, it might just mean holding off for now.
If you’re wondering can you refinance student loans, the answer is yes. It’s a possibility. But should you refinance your student loans and are you eligible to refinance are different questions. Consider these guidelines for eligibility and research your options. For additional help, consider booking a consultation for a custom plan to help you decide.
Have you refinanced your student loans? Has it made a big difference in your life? Tell us below!