Refinancing student loans is a great way to change the current terms of your loans. It allows you to extend your loan term if you’re struggling financially and wish to reduce your monthly payments. It also allows you to increase the monthly payments if you can afford this. This helps you save on the accrued interest while also clearing your debt earlier. If your credit is good, you may qualify for lower interest saving you thousands over the life of the loan.
Every lender sets its own eligibility criteria for refinancing. This could vary from one lender to another. However, most lenders will require you to meet these general requirements to refinance a student loan.
Your credit score has the biggest impact on whether or not you get approved for refinancing. Lenders want to make sure that you are a reliable borrower. Your credit score speaks volumes about this aspect. A good score means you pay all debts on time and are financially responsible. This is a good sign for lenders who will approve your refinancing without a problem. A high credit score may also qualify you for a lower rate of interest on the refinanced loan.
So what is a good credit score for refinancing a student loan? In general, you’ll need a score of at least 650 to be eligible for refinancing. The higher the better. The higher your score, the better your chances of qualifying. A higher score will also qualify you for lower interest.
The debt-to-income ratio is the percentage of your monthly income that goes towards necessary expenses such as rents and utilities. A low debt-to-income ratio indicates that you’re earning enough to pay off your monthly expenses comfortably. This is reassuring to lenders as it means you can afford the monthly loan payments and are less likely to default. The lower your debt-to-income ratio, the better.
Most lenders will require borrowers to have a debt-to-income ratio of less than 50% to get approved for refinancing. The lower the better. You may not qualify if your ratio is higher than 50%.
Before refinancing your student loan, lenders want to make sure that you can afford to make the monthly payments. Having a steady job or some source of consistent income is reassuring to lenders. It means you have money coming in every month and are able to make the monthly payments consistently without any issues.
Most lenders require you to have a minimum amount in student loans to get approved for refinancing. This minimum refinancing amount varies from one lender to another. In most cases, you will need to have a minimum of $5,000 in student loans to get approved. This is because the refinancing process takes a considerable amount of time and paperwork. Lenders require a minimum amount to ensure that it’s worth their time. It also ensures that they’ll earn a substantial return from the interest that you pay over the loan term.
You will need to have graduated in order to get approved for student loan refinancing with most lenders. This is regardless of the reason why you dropped out of college without graduating. The reasoning is that students who haven’t graduated find it more difficult to get high-paying jobs. This makes them high-risk borrowers who are more likely to default on their monthly payments. Most lenders find this an unnecessary hassle.
A few lenders may approve your application if you have a cosigner, though. However, they will almost always charge a higher interest rate to offset the risk.
When you miss a payment deadline, the payment is considered a ‘late payment’. If that payment is not made within a certain number of days, it goes into default. Federal student loans enter default if they remain unpaid for 270 days. Private student loans enter default if they remain unpaid for 120 days. Lenders are hesitant to refinance loans that are currently in default as it indicates that you’re already struggling to make payments.
This does not apply to student loans that may have been in default earlier. As long as you’ve made the payments and rehabilitated the loan, you may be eligible for refinancing.
If you meet all the general requirements, before processing the paperwork, the lender will want to see these documents:
If you need to refinance your student loan urgently but don’t meet the requirements, you have one option available. Most lenders will allow you to refinance with a cosigner. A cosigner could be anyone who meets the lender’s requirements in terms of credit score, debt-to-income ratio, and other criteria. This could be a parent, sibling, relative or friend who is willing to share the responsibility of the loan with you.
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