As the COVID-19 pandemic causes interest rates to drop to near-zero figures, graduates and former students are increasingly opting for student loan refinancing plans. Replacing old loans with new loans that have a lower interest rate is a great way to free up cash for other expenses.
With the U.S. unemployment rate surging to 14.7%, financial insecurity has become a nationwide threat for Americans who are knee-deep in student loan debt. And while the U.S. House of Representatives recently passed the HEROES Act (a $3-trillion stimulus bill) to offer student debt relief, many Senate Republicans announced that they would not be supporting the legislation.
If you were hopeful that federal and private student loan forgiveness would help you get by, the reality is much bleaker than expected.
According to Forbes, there are currently 45 million student loan borrowers who owe a whopping $1.6 trillion in student loan debt. As the year progresses, these figures are expected to worsen exponentially.
Student loan refinancing is a safe and convenient way to relieve financial strain during a time of crisis, chaos, and uncertainty.
In fact, debtors who refinance their student loans can save an average of $272 every month. By the time they pay off their student loans, they’re expected to save an average of $13,940.
However, not everyone can qualify for the process.
If you’ve been considering refinancing your student loans but aren’t quite sure where you stand, we’ve rounded up the requirements to help you get started.
Requirement 1: The Basics
Before familiarizing yourself with the specific requirements, it’s important to ensure you check the basics:
- You must be a U.S. citizen or permanent resident, and you should possess proper evidence of eligibility
- You must be at the age of majority or older when applying for student loan refinancing
- You must have a minimum loan amount of $15,000
Requirement 2: A Good Credit Score
Once you’ve covered the basics, we suggest checking your credit score. As one of the most important student loan refinancing requirements, your credit standing can potentially make or break your eligibility.
Ideally, you should have a minimum credit score of 680. Of course, the higher your credit score, the better your chances of acquiring a lower interest rate. Borrowers with a credit score of 700 or above receive more options and are offered better terms.
If you have a low credit score, we suggest taking the time to improve it. Here are some suggestions:
- Make timely payments
- Set up payment reminders to meet deadlines
- Reduce unnecessary debt
- Review your credit report and dispute inaccuracies
- Request higher credit limits without a hard inquiry
- Don’t close unused credit card accounts
- Avoid hard inquiries on your credit report by applying for new credit sparingly
- Consider debt consolidation
- Check if you qualify for a 0% interest card
- Keep your credit utilization low (30% or less)
Alternatively, you could also find a qualified co-signer to apply with you.
In addition to ensuring a good credit score, you should also have a minimum credit history of 36 months.
Requirement 3: A Low Debt-to-Income Ratio
It’s important for lenders to ascertain that your income can cover your debt payments, including your new and improved student loan payment. Student loan refinancing companies take each applicant’s debt-to-income ratio into consideration to determine whether they qualify for a refinancing plan or not.
The lower the ratio, the better.
In most cases, lenders look for a ratio of 50% or less.
If you have a high debt-to-income ratio, we suggest taking measures to:
- Cut your spending
- Increase your gross monthly income by negotiating a higher salary, taking up a side job, or expanding your skill set and improving marketability to find a higher-paying job
- Consolidate your debt
- Avoid taking on more debt
- Use less credit by putting off costly and unnecessary purchases
- Calculate your debt-to-income ratio on a monthly basis to track progress and keep yourself in check
Requirement 4: Possession of the Required Documents
While you may meet the aforementioned requirements, you can’t apply for student loan refinancing if you’re not in possession of the right documentation.
We strongly suggest collecting the required paperwork to ensure eligibility.
You will be requested to submit:
- Government-issued identification
- Proof of employment (recent pay stubs, etc.)
- Proof of graduation (Bachelor’s degree or higher)
- Proof of residency
- W-2 form from the most recent tax year
- Tax returns (only if self-employed)
- Account information to facilitate online payments
- Current billing statement or payoff letter
Once you’ve collected the required information, you’ll be requested to submit it electronically. You can either choose to send screenshots or upload photos directly from your smartphone for convenience.
In some cases, you may be asked to submit supporting documentation. However, most student loan refinancing companies only require the aforementioned paperwork.
How Should I Get Started?
If you meet all the requirements, you can officially apply to refinance your student loans.
We suggest using a student loan refinance calculator to determine how much money you can save by opting for a refinancing plan. Simply enter your current student loan debt, monthly payment, term, and interest rate. You’ll receive estimates for fixed and variable loan rates, depending on whichever option you prefer.
If you’re unsure, find out more about the differences between fixed and variable student loan rates.
We also suggest looking into the different benefits of private loan refinancing and federal loan refinancing. Depending on the type of loan you’ve taken out, familiarizing yourself with the unique benefits of refinancing it will help you prepare in advance.
By lowering monthly payments, student loan refinancing also enables people to pay off their loans faster. This, in turn, builds credit and decreases the debt-to-income ratio. While you’ll manage to save up in the long run, you’ll also increase your chances of qualifying for a mortgage.
Find out more about how to refinance student loans to kick-start the process and effectively manage your finances in the long run!
About the Author
The author is a student loan refinancing expert at ELFI (Education Loan Finance)—one of the leading student loan refinancing and loan providers across the nation. She helps fresh graduates and former students find suitable refinancing plans based on their needs.