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Why, when and how should you refi your student loans?

Refinancing your student loans

Is refinancing your students loans a good deal? And where do you even start? 45 million people in the US have student loan debt, totaling to a whopping $1.6 trillion. It’s safe to say student loans are a hot topic, and consequently, refinancing options are too. That’s what our show is about today, so if you have question on why, how, and when to refinance your student loans, stay with me for this show!

Hi Everyone and welcome to our live Facebook show, Ask Abby, I’m Abby, and we here at Credit & Debt are dedicated to answering all your questions about your finances. We are kicking off our first full week of our student loan series with the very pressing question: How do student loan refis work? I have had many people approach me with this question, in fact, I was asking this question for my own finances not too long ago. I did the research for you and I have the answers you’re looking for so while we get started, please share this video and punch that like button so that your friends with student loans – I know you want to help your friends – can have their questions answered too.

First thing’s first, we have to understand what a student loan is before we dive into the refi aspect. Most of your probably already know, but if you don’t, or if you’d like a refresher on how loans are broken down, watch this quick, 1-minute video:

Now that we are all caught up, Let’s work to understand student loan refinancing.

First off, the “Why” aspect. Why should you refinance your student loans? Student loan refinancing is usually good for a variety of goals. So whether you’re looking to:

  1. Consolidate your loans to allow you to make one monthly payment
  2. Lower your interest rate so that you pay less over time
  3. Lower your monthly payment, Or
  4. Pay off your student loans faster

Refinancing might be a good option for you but, there are a number of things to consider before you start filling out applications.  

Once you get past that little fact and decide that you’re okay with taking out a private loan, it’s time to consider all the aspects that go into the “when” question: when should you refinance your student loans?

First off, you should take a good hard look at your credit score. To make a refi worth it, you’re credit score has to be looking pretty good. Why? Because you’re basically trying to convince a stranger that you’re financially responsible. So, if you’re wondering, well I have tens of thousands of dollars in student loan debt, how good can that be for my credit score? That’s a great question and I actually answered that for you in last week’s Ask Abby Episode.

When it comes to refinancing, the better your credit score, the better your interest rate. Forbes says that the best student loan lenders expect you to have a score in the mid to high 600s. But, there are some lenders out there who don’t have a minimum credit score, just proceed with caution. Either way, it never hurts to be working toward a better credit score.

A few other considerations for deciding when you should refinance your student loans are things like:

  • Do you have an income and is it enough? Lenders don’t necessarily care about how much money you make, they just want to ensure it’s enough to pay all of your bills, including (and especially) your new student loan payment. If you’re unemployed or furloughed, hold off on the refi app for right now.
  • Your debt-to-income ratio. If you have a significant amount of debt outside your student loans, lenders might not accept your application
  • Another thing is: are interest rates actually lower than your current rate? You can usually go online and simulate your
  • When you don’t have other major credit purchases lined up. Student loans trigger a hard credit pull, which will lower your credit score

If you’ve considered all of those things; your credit score is at least in the mid to high 600s, you have a steady income that allows you to comfortably make your payments, you don’t have too much debt, and your don’t have another major purchase lined up… you’re probably in a pretty good place to refinance your student loans.

Now, let’s talk about a few circumstances, aside from those we discussed above, why you might not want to refi.

The first reason you might not want to refi is if you only have Federal student loans. Why? Well, one reason is that the federal government doesn’t offer refinancing options, which means that in order to refinance, you’ll be getting a private loan to pay off your federal loan. Obviously, there are some upsides to a private loan. For one, finding a lower interest rate with a private lender can save you money. That said, the federal government has some extra programs and benefits that private lenders can’t offer. Student loan forbearance and deferment are often options without penalty for federal student loans. And under certain circumstances, like a pandemic that cripples the economy, everyone who has a private student loan knows that the CARES Act didn’t do them much good, whereas those with federal student loans had their payments deferred until September 30th, no penalties and no action needed.

Another reason you might not be in a good position to refinance is that you are already behind on your payments. Students loans are usually with you for the long-term, so trouble with your job and income is likely somewhere along the way, which means you might need to refi to lower your payments every month. That said, if you’re already behind on your payments on your current loan, lenders will be hesitant to get you a new one.

So you should be all set at the point with the Why and When to refinance your student loans. If you have another question, feel free to throw it the comment bar or message me because now we are going to talk about the questions of how to refinance.

Like I mentioned a bit earlier is that the first thing you should do is check your credit score. That will help you understand a ball park of where you’ll be interest-rate wise prior to filling out any applications. Credit Karma, Mint, credit.com and your almost all major banks offer free credit scores. It doesn’t hurt your score for you to check it on these sites, but a hard credit pull like the ones the lenders will do when you go to refi WILL drop your score so, checking beforehand allows you to ensure you’re in the right ballpark before filling out any applications.

Now that you know your credit score, the next step is to look up your current loan standing. You’ll need to know your loan types and the balance and interest on each of those loans. There are a few ways to look this up. One way is to go to your servicer’s websites, write them all down. Another way is to go to https://studentaid.gov/, I’ll put that link in the comment bar for you:

That will pull up recent history for all of your federal loans along with some other great resources. Keep in mind that right now, your interest rate will show 0, but that’s only until the end of September.

If you have private student loans and you’re not sure how who your servicer or lender is, you can find out by checking you credit report. You can do that for free at annualcreditreport.com.

Find your private students loans on your free credit report: annualcreditreport.com

Once you find out who services those loans, you can register on their site – if you haven’t already – and find out your interest rates and balances.

After you check your credit score and know where your current loans stand, you can start to do some interest rate comparisons. Websites like Credible and Nerdwallet allow you to see your interest rate for free online without hurting your score. They’ll compare at least 10 lenders’ rates for you based on your personal information like your credit score, income, and debt amount. Some of the most common lenders include Sofi, Earnest and Laurel Road. And, they’ll often tell you right there what the minimum credit score is for those interest rates.

Once you figure out which lenders you’re going to submit applications to, it’s important to be strategic in order to minimize any negative effects on your credit score. First off, ask about pre-qualification applications. A lot of lenders will allow you to pre-qual prior to a hard credit pull. So, while you got a decent idea of where you might stand based on your previous shopping, this will give you near-exact estimates of your refinanced loan, including your exact interest rate and monthly payments.

Then, once you start filling out the real-deal applications, make sure all the hard inquiries happen within a 14-day period. If you do, your credit will only usually take the hit once and probably only drop 5-10 points. If you wait too long, your shopping around could result in multiple hits to your credit score.

Now, the last thing to know while going through the student loan refi process is that you still need to pay your current loans if you have due dates coming up. If you miss a payment, your loan application could be denied, even if you were already pre-qualified. This is important because sometimes the refinancing process can take as little as two weeks and as long as a few months. So, just make sure you continue paying your soon-to-be “old” lender, until you get confirmation from your new lender than the process is complete and receive instructions on how to make your new payments.

So, what other questions do you all have on refinancing your student loans? Do you ave any stories about your process you would be willing to share with me? If you do, please feel free to reach out to me either by sending a message on Facebook or you can email me directly as askabby@creditanddebt.org.

That’s our show today you guys and what a great way to kick off this student loans series for you. We have two more weeks of student loans topics to cover, so if you have questions along the way, please don’t hesitate to ask! If you’re facing some trouble with your finances right now, please remember that you can call our coaches for free for financial advice. We can help you create a budget and even find your way out of debt. We have helped so many people along the way and that’s my mission and our mission hear at Credit & Debt. Don’t forget to share and like this video so that more people with student debt can get some help understanding their refi options! There’s 45 million people out there that this topic is relevant to, so chances are, you have friends and family that have questions. Thank you again for watching everyone and we will see you next week on Ask Abby!

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