Student loan debt is a common component of earning a college degree for many graduates. In fact, the latest statistics highlight the growing number of college graduates with student loan debt, many of which leave school with nearly $30,000. Regardless of the amount, student loan debt can be a financial burden that lasts for several decades.
There are many ways to handle this debt, and nearly all come with their fair share of caveats. One such way is refinancing. A student loan refinance means taking out a new loan to pay off one or more student loan balances, leaving just a single loan under new terms. If you refinance, then you may secure a loan at a lower rate. It sounds easy.
Of course, there’s a catch. Student loan refinancing is not a simple win for all students. Here are several things to know to improve your chances for a successful student loan refinance.
Pros and Cons of Student Loan Refinancing
- Reduces Overall Costs
Student loan refinancing can be quite enticing. First, qualified applicants may be able to secure a single interest rate that is lower than the rate offered on the original loan(s). This can drastically reduce the total cost of borrowing over time.
- Can Lower Payments or Decrease Payment Time
Additionally, refinancing student loan debt provides a strategy to restructure repayment. Some graduates may extend the repayment term to lessen the burden on cash flow, while others may opt to expedite their repayment with a shorter term.
- It’s hard to qualify!
One or more of these benefits can make student loan refinancing beneficial to graduating students with debt. However, student loan refinancing is not as simple as filling out an application and receiving the funds for the new loan. Lenders look at several factors, including credit history, score, income, and in some cases, career trajectories of borrowers.
The combination of these approval factors can make it incredibly difficult to qualify for a refinanced student loan, especially right after graduation. Fortunately, there are ways to improve the chances of getting approval with a private lender.
What to Consider Before Applying for Student Loan Refinancing
Prior to applying for a student loan refinance as a graduate, it is essential to consider the following points that private lenders review with every application. Understanding these common requirements for qualification helps make your application stronger from the start.
- You Need Excellent Credit
First and foremost, private lenders want to rest assured that the loan they are offering to a new borrower is not high risk. To evaluate the risk of an applicant, lenders take a closer look at credit history. Specifically, they look for any missteps with credit management in the past, like late payments, collection accounts, or bankruptcies. Student loan borrowers who have these issues on their credit report are not as likely to get approved for a new refinanced loan.
To improve the chances of a successful refinance application, start by pulling your credit report and checking your score. Any errors found on your report can be disputed and hopefully removed relatively quickly. If you have minimal credit history or marks of financial blunders in the past, think about your options for rebuilding your credit before applying. Opening a secured credit card or taking out a small loan – and making on-time payments each month – may help in raising your credit profile for private lenders. The same is true for making on-time payments for your current accounts, not the least of which include your current student loans.
- You Need High Income
In addition to strong credit history and score, private lenders also want to know you have the ability to repay the new refinanced loan with ease. For this requirement, lenders look to your income history and future earning potential. Without steady income or a long employment history, you may not have a great chance of getting an approval for a refinanced student loan.
If your income does not meet the minimum requirements for a private lender, you have a few options. Seeking out new employment is not always an easy task, but asking for a raise or a promotion with your current employer may help with income requirements for an application. Additionally, there are countless options for earning additional income through contract or freelance work. Self-employed income may help, but be sure you receive a detailed account of the income you receive from 1099 to prove supplemental income.
Putting it All Together
Getting approved for a student loan refinance with a private lender is not a simple feat, but following the steps above may improve your chances of a successful application. If these action items are not within your abilities at the current moment, it may be worth considering the reality of the situation. For some graduates, it is best to hold off on a new student loan refinancing application until their chances of approval improve naturally.
For instance, taking several months to pay off any debt, such as student loans, will boost your credit score over time which makes for a stronger application. Similarly, waiting out new job prospects instead of rushing into the raise question or promotion may be a smarter move for the long-term.
It is important not only to consider your need for a student loan refinance but also your current – and future – circumstances. Be sure to think through your options for improving your application while also evaluating your ability to do so with ease.
By guest author Andrew Rombach, a Content Associate from LendEDU – a financial product marketplace and consumer education website.
When considering refinancing, it’s always a good idea to talk it through with someone who knows about all the repayment options and who can help get you on a plan you can afford. The NFCC has nonprofit student loan counselors available to help. Contact one today!