Thanks to new programs from banks and specialized student loan refinancing companies, getting a great interest rate on your student loans is easier than ever. But before you apply for a student loan refinance, take a few steps to brush up your credit and be sure you're really ready.
1. Pull Your Latest Credit Reports & Scores
If you're like most U.S. graduates, you've got quite a bit of student loan debt hanging around. And with a big loan like this one, you'll want to be sure your credit is up to snuff before you apply.
Since it's impossible to know which major credit bureau's credit report and score potential lenders will pull, it can be a good idea to pull all three, since they can each contain slightly different information. You can check your credit score, which is the number an algorithm assigns to all that information in each credit file, in a variety of ways. You can see your two free scores, updated each month, on Credit.com. Also, many credit card companies are now offering free credit scores each month as well.
2. Take Time to Boost Your Credit
Student loan refinances are relatively high-risk operations for lenders. They're often for large amounts, and there's no collateral (like a home or car) that the lender can seize if you default. Because of this, you'll need a pretty high credit score to get a good rate on your student loan refinance.
If you're in the 600s or low 700s right now, it may be worth your time and effort to boost your credit score before you apply for a refinance. Here are the top steps to make it happen:
- Clean up your report. It's not unusual for credit bureaus to show mistakes on your report. This is why you should check all three reports, and then take time to correct these errors.
- Pay bills on time. Missed any bill payments recently? There's no quicker way to tank your credit score.
- Get your budget in gear, and make sure all your payments are made on time. Your credit score will thank you.
- Pay down revolving debt. If you've got high credit card balances, paying them down is one of the fastest ways to boost your credit score.
- Take out a new type of loan. If you've never had a car or home loan, adding on to your credit report can actually boost your score (as long as you make payments on time). If you're already in the market for your first home, for instance, you might consider waiting until you've made six or eight mortgage payments before you apply to refinance your student loans.
3. Get a Grip on Your Repayment Options
Before you sign up to refinance your student loans with a private lender, take a step back and look at your repayment options. If most of your loans are through the federal government, you'll have a huge variety of repayment options, including income-driven repayment options.
Plus, if you work as a teacher, public servant or for a nonprofit, you may be eligible for student loan forgiveness. In some cases, making lower, income-driven payments for 10 years and then taking loan forgiveness can save you a lot of money.
This all depends on your current financial situation, what you might earn in the future and even your current student loan's APR. It's essential to think through your options before making the assumption that a refinance is the right choice.
4. Shop Around for a Lender
If you do decide refinancing your student loans through a private lender is a great option, take time to shop around. Any time you're dealing with a large amount of money, the best practice is to research at least two or three different lenders.
Many banks and credit unions these days are offering special programs for refinancing student loans. And some companies have popped up to serve the student loan refinance market. If you have a low loan balance and great credit, you may also be able to refinance with an unsecured personal loan.
The key is to scope out your options. Look for the company that offers the lowest APR, but also look at additional terms and conditions that could save you money. For instance, some lenders may reduce your interest rate after a certain number of on-time payments.
So long as you apply for a refinance to all of these potential lenders within a week or two, the credit inquiry should only ding your credit score once. But don't drag the process out too long, or each inquiry will take another chunk out of your score.
Refinancing your student loans can be a great option. It can lower your APR, give you a lower monthly payment, and generally reduce the total amount you pay towards your student loans. Before you apply, take these four steps to ensure you get the best possible refinance deal.
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