Student loan repayment generally doesn’t start until after graduation, but there’s plenty student borrowers can do to prepare in advance, especially if they plan to refinance their loans.
Ideally, student loan refinancing might result in a loan with a lower interest rate, which could save borrowers money. However, approval for refinancing — and qualifying for lower interest rates — requires a strong financial profile, including good credit and a stable income.
Laying the groundwork as a student may help put borrowers in a stronger financial position when they apply for refinancing. Learn about some key strategies to prepare for student loan refinance.
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Key Points
• Strengthening credit while in school through such methods as on-time debt payments and low credit utilization may help improve refinancing prospects.
• Understanding student loan specifics, including loan types, balances, interest rates, repayment terms, and payment due dates, is important for preparing for refinancing.
• Paying off credit card debt by exceeding minimum payments, setting up automatic payments, and avoiding missed due dates may strengthen a borrower’s credit profile.
• Borrowing only necessary amounts helps keep debt-to-income ratios low, while planning for employment before graduation may help fulfill steady income requirements for refinancing.
• Refinancing federal loans eliminates access to federal repayment plans, forgiveness programs, and other benefits, requiring careful consideration before applying for refinancing.
What Is Student Loan Refinancing?
Student loan refinancing is the process of replacing one or more of your current student loans with a new private loan from a private lender. The new loan might have a lower interest rate, which could result in savings, as well as more favorable terms. Plus, combining several loans into one new loan with a single monthly payment could make repayment easier to manage.
To qualify for student loan refinancing, borrowers generally need a good credit score, stable income, and a low debt-to-income ratio. Lenders typically offer the best interest rates to borrowers with the strongest financial profile. If a borrower doesn’t have a robust credit history, applying to refinance student loans with a cosigner might increase their chances of approval and getting a lower rate.
Along with the possible benefits of refinancing, however, there’s a downside to be aware of. If you refinance federal loans, you’ll lose eligibility for federal repayment plans, forgiveness programs, and other protections. Refinancing wouldn’t be a good option for borrowers with federal loans who plan to use any of these programs.
Why Planning Ahead Matters
While many lenders require students to graduate before they refinance student loans, some advance planning could make a borrower a stronger candidate when the time comes. Here are some reasons to prepare for student loan refinancing while still in school.
Potential Interest Savings
One of the potential benefits of refinancing student loans is saving money on interest. When a student originally borrowed their loans, they may have gotten a higher interest rate due to economic conditions at the time and/or having a weak credit profile.
However, if a borrower works on building their credit while they’re in school, they may be able to get a lower rate through refinancing. Even a small rate reduction could lead to significant savings over the life of the loan, especially for those with a large student loan balance.
Credit Profile Preparation
A borrower’s credit profile plays a major role in getting approved for student loan refinancing, making it an important aspect of student loan refinance planning. Credit profile is also important in determining the student loan interest rate borrowers get.
While in school, students can work on establishing and strengthening their credit. Making on-time payments on debt like credit cards and keeping credit card utilization low, for example, can both have a positive impact on credit score. Those with a thin credit history might consider using a credit-building strategy, such as taking out a secured credit card and using it responsibly or becoming an authorized user on someone else’s credit card.
Starting to build credit early can also lengthen an individual’s credit history, which influences 15% of their FICO score.
Understanding Loan Structure
Another key element in student loan refinancing planning is to become familiar with the specifics of your student loans. Know the types of student loans you have — federal loans, private loans, or a mix of both. Review your current balances, interest rates, and repayment terms, and determine when your first payments are due.
By taking time to understand your loans, you can make smarter decisions about which ones might benefit from refinancing. For example, if you have federal loans and think you may need federal benefits like income-driven repayment or forgiveness, refinancing won’t make sense. But if you have private loans and may qualify for a lower interest rate, refinancing might be an option to explore.
Key Factors That Affect Future Refinancing Eligibility
When a borrower applies for student loan refinancing, the lender analyzes their financial profile. These are the criteria lenders generally use to determine approval and assign a loan’s interest rate.
Credit Score
Credit score represents a borrower’s history of managing debt, such as loans and credit cards. Credit scores range from 300 to 850 and they’re influenced by the following indicators:
• Payment history (35%): Making on-time payments positively impacts credit score, while late payments generally cause scores to drop.
• Amounts owed, or credit utilization (30%): Lenders generally look for a credit utilization (the amount of available credit a borrower is using) under 30%.
• Length of credit history (15%): A longer credit history typically has a positive affect on a person’s credit score.
• Credit mix (10%): Having a mix of credit types, such as installment loans and revolving credit, indicates that a borrower can manage different types of loans and lines of credit.
• New credit (10%): Applying for a lot of new credit accounts in a short period of time can trigger multiple hard credit inquiries, which could lower a borrower’s score.
Lenders prefer borrowers with good or excellent credit, with a score of 670 or higher. The stronger the score, the better the chance a borrower will typically have of getting approved and qualifying for a low rate.
As noted previously, borrowers who don’t have a strong credit history may be able to apply for refinancing with a creditworthy cosigner to improve their odds of approval and getting a lower interest rate. It’s worth shopping around with different refinancing lenders, since rates and eligibility requirements can vary.
Income and Employment
A stable source of income indicates to lenders that a borrower should be able to afford the payments on a refinanced loan. When you apply, you’ll typically need to provide pay stubs or an offer of employment. Some lenders ask for a specific minimum income, while others are more flexible.
Debt-to-Income Ratio
Debt-to-income (DTI) ratio is your monthly debt compared to your gross monthly income. For example, if you’re paying $1,000 each month toward loans and credit cards and you have a monthly gross income of $4,000, your DTI ratio is 25%. Lenders often prefer a DTI of 35% or less, as it suggests you have enough income to repay your debt.
Steps Students Can Take Before Graduation
For those considering student loan refinancing, there are several steps they can take while still in school to prepare.
Building Credit Responsibly
Focusing on building credit now may help make a borrower a stronger applicant for refinancing later. Ways to do this include:
• Paying bills on time, such as credit cards, utilities, medical expenses, and any loans already in repayment.
• Using credit responsibly. That means making only small purchases with a credit card and paying off the balance in full each month, if possible.
• Avoiding applying for too many new lines of credit. Lots of hard crest inquiries in a short period of time may have a negative impact on your credit score.
Students with a slim credit history might start building one by getting a secured credit card that requires a deposit but no credit check, or becoming an authorized user on a credit card, such as a parent’s card. That person’s on-time payments can positively impact your score — though any late payments would have a negative effect.
Managing Existing Balances
Work to pay off debt like credit card debt. Try to make more than the minimum balance due each month to help reduce interest charges. Additionally, be sure to pay your bills on time. Consider setting up automatic payments so you don’t miss any due dates.
Avoiding Unnecessary Debt
It may be tempting to splurge on concerts or a spring break trip, but borrowing money for non-essential expenses can cause debt to accumulate and interest charges to grow unless you pay it back promptly.
A good rule of thumb is to borrow only what you need. This can help keep your DTI low, which may positively impact your credit score.
Common Mistakes Students Make Before Refinancing
To prepare for student loan refinance, there are a few common mistakes to be aware of.
• Neglecting your credit profile: Financial habits practiced while in school can impact your credit after graduation. Prioritize your credit as a student by making on-time payments and keeping credit utilization low.
• Taking on unnecessary debt: Overspending can burden your finances and increase your DTI ratio, which could make it harder to get approved for refinancing.
• Over-using credit cards: Charging too much increases credit utilization and may negatively impact your credit profile.
• Not planning for employment ahead of time: Waiting until after you graduate to start looking for a job can delay earning a steady income, a common requirement for refinancing.
• Failing to consider the drawbacks of refinancing federal loans: Refinancing federal loans makes them ineligible for federal repayment plans, forgiveness programs, and other benefits. It’s essential to understand this if you think you may need these benefits.
How Refinancing Fits Into a Long-Term Debt Strategy
Refinancing might be one piece of a strategy for managing student loan debt over time. When you refinance, you can choose repayment terms that fit your repayment goals. For instance, a long repayment term could lower your monthly payments, which could make them easier to afford, but it also means paying more in interest over the life of the loan and spending more time in debt. A shorter loan term means higher monthly payments, but paying off your loans faster and saving on interest charges overall.
When choosing a loan term, a borrower can try to strike a balance between affordable monthly payments and reasonable total interest costs. It’s also important to consider other financial obligations, like rent, living expenses, and long-term savings goals.
Also, refinancing doesn’t have to be a one-and-done process. If their credit strengthens or interest rates drop, a borrower might refinance student loans again to secure better terms. Using a student loan refinancing calculator can be helpful for estimating savings.
And finally, refinancing federal loans may not fit into a student’s long-term strategy at all if they may qualify for a program like Public Service Loan Forgiveness or if they want to use an income-driven repayment plan.
The Takeaway
While student loan refinancing may not happen until after graduation, taking steps to prepare now could put a borrower in a stronger financial position when the time comes. By building credit, managing debt, and planning for future employment, a student may be able to improve their chances of qualifying for refinancing and potentially getting more favorable rates and terms.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
How soon after graduation can you refinance?
You can refinance any time after graduation as long as you can meet a lender’s requirements, which typically include a minimum credit score, stable income, and an acceptable debt-to-income ratio.
Can you refinance without income?
It may be possible to refinance without an income if you’ll be starting a job soon and can show your lender an offer of employment. Another option is to apply for refinancing with a creditworthy cosigner. Otherwise, it would likely be difficult to get approved because a lender wants to ensure you have the means to pay back your loan.
Should students worry about refinancing early?
Students interested in refinancing may want to take steps to prepare, such as building credit while in school, managing debt, and planning their job search. Strengthening their financial profile may help them qualify for refinancing and potentially get a lower interest rate.
What improves refinance approval chances?
Several factors may improve the chances of student loan refinancing approval, including building credit, having a stable income, and reducing debt-to-income ratio. For those without strong credit, applying with a creditworthy cosigner might also help improve their chances of approval.
Photo credit: iStock/Nikola Stojadinovic
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Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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