(STL.News) There’s a staggering about of student debt held by American borrowers. The current statistics show U.S. consumers’ cumulative student loans have reached $1.75 trillion. This is a massive amount of total debt—the vast majority of which is from the federal government. Those who want to pay off their student debt faster might consider things like refinancing. It’s good to know some things lenders consider before refinancing a student loan.
What Is Refinancing?
Of all the various financial terms in existence, few are more relevant than refinancing. This is something that happens in huge volumes every single day, across basically all forms of debt.
With something so widely applicable, it’s important to know the basics of refinancing even if you’re not totally sure it’s the right move for you right now. So, what is refinancing? In simple terms, refinancing a loan simply means you’re replacing old debt with a new agreement. While some might be skeptical of this idea, since taking out more debt to cover what you already owe sounds a bit dangerous, this isn’t really what’s happening when you refinance a loan.
Instead of simply taking out more debt and using it to pay interest on your current loan, the refinanced loan will entirely take the place of your old one. The benefit here is that you can radically change the interest rates and repayment terms on your loan. Doing this can lead to you paying significantly less over time or lowering your monthly payment right now.
As you can see, this can be a hugely beneficial option when used in the correct way. It’s important to note every student loan refinance happens with a private lender. While there are some extra considerations that need to be made here for those with federal loans, this is something we’ll discuss in a later section. One element that affects every person considering a refinance of any kind is the ability to get approved for it. Let’s take a look at some things lenders consider before refinancing a student loan.
Things Lenders Consider Before Refinancing a Student Loan
Individuals considering a student loan refinance will need to get approved for a private loan. But what hurdles do you have to meet to complete a student loan refinance? Here are some of the main requirements:
- Minimum debt level – Many lenders will want to see that you have a certain amount of debt to go through with the refinance. Since refinancing is a free process to the consumer, lenders will want to have a certain amount of principal coming over to their loan portfolio in order to make the transaction worthwhile on their end. This minimum level will vary between lenders, but will often be around $5,000 or higher.
- No bankruptcies or defaults – There might be some exceptions to this rule, but most private student loan lenders are going to want to see a record clear of bankruptcy. Since student loans carry no collateral, lenders don’t want to deal with the hassles involved with collecting their money if someone can’t pay their bills.
- Meet credit score requirements – Similar to the previous point, lenders are going to require borrowers to hit certain credit score levels to qualify for a student loan refinance. This can typically be worked around, however, if you have a cosigner.
- You have employment – Again, lenders don’t want to refinance loans for individuals who they suspect might not pay their debt. A lender will want to see that you’re currently employed with a steady income.
These are a few of the top things a lender will look at to determine if they want to refinance your student loans. It’s important to know, however, that just because you qualify for a student loan refinance doesn’t mean it’s the best choice for you.
Those who have federal student loans will lose benefits such as loan forbearance and income-driven repayment plans if they refinance. If you plan on taking advantage of these at some point in the future, refinancing might not be your best option. Those with private loans or higher interest federal loans, however, will likely benefit from locking in a lower interest rate.
There can be some hoops to jump through to qualify for a student loan refinance. Once you’ve checked all these boxes, however, it can vastly improve your financial health.