Student loans are one of the most preferred ways to finance higher studies. However, things don’t go as planned every time. Sometimes you may feel that the debt is too much for you to handle, leaving you at the risk of default. If you are one of the many students struggling to handle your mounting debt, then student loan refinancing may just be the right solution for you. However, before that can happen, you need to be eligible for the refinancing option.
In this article, we will give you important tips on how to increase your chances of getting approved for student loan refinancing. But first, let us understand what exactly it is.
What Is Student Loan Refinancing?
Student loan refinancing is a debt consolidation option that allows you to merge your student loans – federal and private – into one single loan with lower rate of interest. Needless to say, your monthly repayments will reduce significantly which, in turn, will help you save lots of money in interest.
In this option, you can choose a variable rate of interest and a repayment term for up to 20 years. However, it is important to know that the federal government does not provide student loan refinancing. Therefore, you should seek student loan refinancing from private lenders.
Another important thing to note is that once you refinance your student loan, your federal loan will be absorbed into your new loan and you will lose access to federal benefits and repayment plans. However, if you are dealing with severe financial hardships, some lenders may be willing to consider deferral or some kind of forbearance to help you pull through.
Tips To Get Approved For Student Loan Refinancing
Unlike federal lenders, private lenders follow a stringent underwriting process. By extending you credit, the lenders are putting their money at risk. It goes without saying that the lenders will leave no stone unturned to safeguard their capital. These companies will only lend to students who have the highest probability of repaying their loan without any defaults.
While each lender follows its own underwriting method, they understand that each student’s case is unique. Here are some of the general tips to help you get the refinancing approval.
* Maintain A Good Credit Score
Your credit score is the holy grail of your creditworthiness. Anytime you apply for a loan, the first thing any lender would do is to check your credit score. They want to see your financial history and repayment ethics. And your credit score is one of the easiest ways to assess your financial and repayment history.
To increase your chances of approval, you should aim for no less than a score of 700, better if it is higher. However, lenders are usually willing to risk it with borrowers who have a credit score of 650 and above.
* Have A Steady Income
Not only is the credit score integral to your refinancing approval, you must also have proof of stable and recurring income. This gives your lender the confidence that you will repay the loan in a timely manner.
To get an insight into your repayment capability, you can look into your income after taxes and then deduct the monthly payments that will be pegged towards your refinanced loan. In the end, you should be left with enough to pay for your basic expenses. However, if you notice that the money left is not enough to either repay your loan or pay your bills, then you can increase your chances of getting approved by adding a co-signor with a solid credit profile to your application.
* Eliminate Or Limit All Debt
A lender will evaluate your existing debt profile before extending you more credit. If you have any other debt apart from your student loan, then your chances of refinancing the loan may reduce. Credit cards, mortgages, car loans, etc. are additional debt obligations that your lender will review before giving you more credit. Experts recommend that if you are capable of repaying these debts, then consider eliminating them or at least limiting them before you apply for refinancing. The fewer obligations you have, the better it is for you.
* Have A Steady Job
An unemployed person with mounds of debt and no source of income is the last person a lender will give a loan! However, you are eligible if you have a job offer from a company before you apply for loan refinancing. If you are unemployed or do not make enough income, then your best bet is to rope in a co-signer with a strong credit rating to qualify for the refinancing option.