How to refinance your student loans in 5 steps

If you have student loan debt, refinancing can be a smart move — one that can lower your interest rate and streamline multiple loans into a single debt. Before taking this step, however, it’s important to lay the groundwork to get the most competitive loan possible.

This process can include a range of factors, like reviewing and improving your credit profile and researching multiple lenders. But, by adequately preparing yourself for the refinance process, it may be easier to find the right options and save money over the long run.

1. Determine if student loan refinancing is the best option

Refinancing a student loan could help you get out of debt sooner and possibly reduce your monthly payment obligations, but this hinges on whether you qualify for a good deal.

Start by checking your credit scores and credit reports to determine where you stand. You typically need a good credit score — usually defined as a FICO score 670 or higher —  to qualify for student loan refinancing without a cosigner. If you find that your credit isn’t in the best shape, you can work to improve your credit before you try to refinance.

It’s equally important to consider the type of loan you currently have, the remaining loan term, the current interest rate and your monthly payment. Here are some key advantages and drawbacks to consider before refinancing.

Pros

• Lower interest rate: Most people refinance to get a lower interest rate. Getting a lower rate means you could pay less interest over the loan term if you don’t extend your repayment term.
• More affordable payments: Refinancing is a good idea if you have an unmanageable monthly payment. Extending your repayment term may ultimately increase the interest you pay, but it will also lower your monthly bill.

Cons

• Forfeiture of key benefits: Refinancing your federal loans means losing federal protections — like federal forbearance and income-driven repayment plans — since it can only be done through private lenders.
• Increased borrowing costs: Refinancing into a longer repayment period could increase the interest you’ll pay on your loan. If it is almost paid off, it could be cheaper to stick with the loan you already have. If you’re at the start of your repayment period, on the other hand, refinancing may make more sense. You may also incur higher borrowing costs if you switch from a fixed-rate loan to a variable-rate loan.

When in doubt, use a student loan calculator to compare your current loan with any new loans you’re considering.

If you have federal student loans and are on the fence about refinancing, proceed with caution. Once you move forward with a private loan, you can’t revert back to a federal student loan to take advantage of the key benefits they offer, as noted in a warning issued by the Consumer Financial Protection Bureau. So, do your homework to ensure you’re making a smart financial move.

2. Research lenders

If you decide to refinance your student loans, the next step is to compile a list of lenders that could work for you. Consider different types of private lenders, which could include banks, credit unions and online lenders, to identify options with attractive terms. Some popular options with competitive rates are:

• LendKey
• Earnest
• Citizens Bank
• SoFi

When researching lenders, you will also want to consider:

• Whether the interest rate you are quoted is fixed or variable
• If the lender allows co-signers to help boost your approval odds
• If the refinanced loan would have simple or compound interest
• If the lender offers bonuses or incentives for refinancing
• What payment options are available, and if they work for your finances
• If flexible due dates and skip-a-payment perks are available
• How the fees assessed by the lender stack up to the competition
• How the lender is perceived by past and current borrowers
• What reviews say about the lender’s responsiveness to inquiries and if borrowers are satisfied

3. Shop for the best student loan options

Each lender uses different criteria to determine your borrowing eligibility and interest rates. Your rate will likely vary between one lender and the next and can be impacted by factors like your credit history, the repayment term you select, and whether you choose fixed or variable interest on the loan.

To find the best deal, you’ll want to prequalify with at least three lenders on your shortlist. Prequalifying typically only requires a soft credit inquiry on your credit report, and you can see the rates and loan terms you might qualify for if you refinance.

4. Submit a loan application

Once you’ve narrowed your shortlist to your preferred lender and loan offer, you must complete an official loan application. Even if you went through a lender’s prequalification process, you must complete this before your loan can be approved.

The lender will likely run a hard credit inquiry to access your full credit report and may want additional information that wasn’t on your prequalification form. If you’re applying with a co-signer, you’ll need to also provide their information.

You may need to provide the lender with copies of documents and information such as:

• Social Security number (SSN)
• Driver’s license or government ID
• Loan payoff statements from existing student loan lenders or servicers
• Proof of graduation
• Proof of employment (pay stubs, W-2, etc.)

Most lenders make it easy to apply online for student loan refinancing in minutes. You could also hear back as soon as the same day or the next business day. Funding timelines vary by lender, though, so it’s worth inquiring before applying to confirm.

Upon approval, the final step of the application process is to review and sign your loan documents. Technology has made this step considerably easier. Where you once had to sign loan documents in person or fax or mail them in, most student loan companies now handle their entire process online for ultimate convenience.

5. Transfer payments to your new lender

After the new loan closes, you will begin making payments on your new loan just like you were with your old one. However, your new lender may not immediately pay off your former loans. Sometimes the process can take a few weeks. Continue making any student loan payments that come due in the meantime so you don’t face late fees or potentially negative credit reporting.

Once your student loan refinance is complete and the debt has been transferred, you should receive a payoff letter from your old lender. You will need to create an account with your new loan servicing company and begin making payments on your refinanced loan.

Keep an eye out for correspondence from the new lender identifying your first bill due date. Many lenders let you choose a date each month that works best for your schedule and budget, and some will offer a discounted rate if you enroll in autopay.

Frequently asked questions

• Who is eligible for student loan refinancing?

  In general, you’ll need to have a credit score in the mid- to high 600s, a debt-to-income ratio of less than 43 percent and a source of steady income to refinance a student loan, but the requirements vary by lender. Getting pre-qualified is an excellent way to see if you’re eligible for student loan refinancing. While prequalification doesn’t guarantee that you’ll be approved, it can help you see if you meet the minimum criteria set by lenders.

• How long does it take to refinance a student loan?

  The timeline for completing the refinance process can vary based on the lender you use. While the application process with some lenders can be relatively quick, it can take time for your existing loan to be paid off by the new lender. In some cases, this may take between 30 to 45 days to complete the process.

• Can you refinance federal student loans?

  Yes, federal student loans can be refinanced with private lenders. However, it is important to carefully weigh the potential pros and cons of refinancing federal student loans with private loans, as private student loans do not offer the same benefits as federal student loans, such as deferment and forbearance.

• Can you put student loans in someone else's name?

  Some lenders allow you to transfer student loans to someone else. Some parents do this with loans they took out for their child’s education, transferring those loans to the adult child once they’re in the workforce. Keep in mind, though, that the loan will have new terms and new rates, which are based on the new borrower’s credit.

• Can you refinance student loans with bad credit?

  Many lenders refinance student loans for people with bad credit, although if a lender does accept a lower credit score, it will almost certainly offer higher rates. As with new student loans, you can often apply for refinancing with a creditworthy co-signer, which could help you get qualified if you have poor credit.

• Does refinancing student loans hurt your credit score?

  When you apply to a refinance lender, the resulting hard inquiry can knock a few points off your credit score. However, this impact is temporary and likely won’t do significant damage.
  
  If you get approved, the resulting opening of the new loan account and closing of the original accounts can also temporarily impact your length of credit history, which is a factor in your credit score. Again, the impact is usually minor and temporary. Refinancing could improve your score in the long term if it helps you more consistently make payments on time and in full.