In refinancing a student loan, borrowers often consolidate all of their loans into a single, new loan. The most common reason for refinancing is to save money by obtaining a lower interest rate. However, the convenience of making a single monthly payment may be sufficient reason to refinance by itself provided the new interest rate is competitive. The savings from a refinance over the term of the loan could be more than $20,000, although it’s likely to be considerably more if you have a degree in a health-related field. The following six tips will increase your chances of qualifying for refinancing on your student loan.
1. Maintain a good credit history
Lenders use your credit score to predict the likelihood that you’ll repay the loan. They calculate your credit score based primarily on your past payment history and current credit utilization. Lenders typically require borrowers to have a credit score of at least 650 to qualify for a student loan, although you’ll stand a better chance of qualifying if your score is in the mid-700s or better. Even if you already qualify, a higher score should still get you a lower interest rate.
You can obtain a copy of your credit report from annualcreditreport.com at no charge. Review your credit report at least one month before you apply for a refinance to allow enough time for any error corrections to be reflected in your credit score. Some lenders will inform you of the reason a loan application was denied, which may be correctable. Bringing a delinquent account current is one such easy fix. You’ll generally need to pay your bills on time and in full for several years before you can qualify for a student loan refinance.
2. Get a cosigner
A cosigner is a second borrower who is obligated to repay a loan in the event the primary borrower is unable to do so. Lenders typically rely on a cosigner's credit report when deciding whether to approve a loan for a college student with little to no credit history. More than 90% of undergraduate students and more than 75% of graduate students need a creditworthy cosigner to qualify for a private student loan.
About 60% of lenders offer cosigner releases for student loan refinances, meaning that the cosigner on the original loan is released from further obligation on the refinanced loan. However, this dispensation requires borrowers to qualify for the refinance entirely on their own. Most borrowers will still require a cosigner for their refinance if they haven't established a strong credit history yet.
3. Ensure sufficient income to repay debt
Lenders also may require you to have a minimum income before refinancing your student loan. In the case of college students, lenders are likely to assume that the cosigner has been making the payments on the original loan. By setting minimum income requirements, lenders try to ensure that borrowers can make payments on the refinanced loan on their own. Waiting until you have a high-paying job is therefore an effective strategy for gaining approval for your student loan refinance.
4. Keep a low debt-to-income ratio
Your debt-to-income ratio is the total amount of debt payments you're making each month divided by your total monthly income. Lenders set limits on the debt-to-income ratio of their borrowers to ensure they’ll have sufficient after-tax income to make the loan payments while still maintaining a reasonable standard of living. In general, you should try to pay the full balance on your credit cards each month to avoid carrying a balance. College students applying for student loan refinancing should have little to no other debt, so it's especially important for them to pay their credit card debts first.
5. Maintain stable employment
Most lenders want borrowers to have a steady job that will allow them to make loan payments reliably. Recent college graduates can maximize their chances of approval for a refinance by staying with their employer for at least two to three years rather than continually job-hopping in search of better situations.
6. Shop around for the best interest rates and fees
Lenders will need to obtain a report of your credit history when considering your application. This action, commonly known as a “hard pull,” will result in a small reduction in your credit score, although it will only be temporary. In the past, credit scoring agencies penalized borrowers for each hard pull, which could significantly reduce their credit score when making multiple applications. Today, these agencies are encouraging borrowers to shop around by grouping their credit applications as a single hard pull, provided they occur within the same time period. No matter how many times you apply for a loan within a 30-day period, you can generally expect only one hard pull to be counted against your credit score.
Lenders routinely advertise the lowest interest rate that they offer, but that doesn't mean you'll necessarily qualify for that rate. When shopping for a student loan refinance, it's important to compare the rate you would actually get against the lender’s advertised rate. You also should consider whether the interest rate is variable or fixed. A variable interest rate changes over the term of the loan and is usually based on a leading market indicator, while a fixed interest rate won’t change at all. Variable rates are generally better if you expect market interest rates to fall, while a rising market favors fixed interest rates.
For example, Figure’s student loan refinance has variable rates that currently start at a 2.055% annual percentage rate (APR), which assumes a discount of 0.25 percentage points for automatic payments.¹ This rate is available to applicants with a credit score of 800 or higher and at least $5,500 per month in discretionary income. Applicants must also select a five-year term to qualify for this rate.
1 The advertised APR includes an autopay discount of 0.25%. As of 01/01/2020, APRs start at 2.305% for customers that do not opt in to autopay. These rates are for the most qualified applicants and are higher for other applicants. To be eligible for the advertised rate, an applicant must have more than $5,500 in discretionary income and a credit score of 800 or higher. Figure calculates monthly discretionary income by reducing monthly income by a state income tax factor, and then subtracting estimated housing expenses, transportation expenses, and other expenses listed in your credit report. The advertised rate is only available for applicants who select 5 year loan terms; longer terms have higher rates. Rates change frequently so your exact interest rate will depend on the date you apply. Loan terms and fees are also subject to change.