(STL.News) There is a staggering increase in student debt held by US borrowers. Current statistics show that US consumers’ cumulative student loans have reached $1.75 trillion. This is a huge total debt, the vast majority of which comes 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 that lenders consider before refinancing a student loan.
What is refinancing?
Of all the different financial terms out there, few are more relevant than refinancing. This is something that happens every day in huge amounts, for virtually all forms of debt.
With something so widely applicable, it’s important to know the basics of refinancing even if you’re not completely sure it’s the right decision for you right now. So what is refinancing? In simple terms, refinancing a loan simply means that you replace the old debt with a new agreement. While some may be skeptical of this idea, since taking on more debt to cover what you already owe seems a bit dangerous, that’s not really what happens when you refinance a loan.
Instead of simply taking on more debt and using it to pay interest on your current loan, the refinanced loan will replace the old one entirely. The advantage here is that you can drastically change the interest rates and repayment terms of your loan. This may cause you to pay significantly less over time or reduce your monthly payment right now.
As you can see, this can be an extremely beneficial option when used correctly. It is important to note that every student loan refinance is done with a private lender. While there are a few additional considerations that need to be made here for those with federal loans, it’s something we’ll discuss in a later section. One thing that affects anyone considering refinancing of any kind is the possibility of obtaining approval 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 student loan refinancing will need to obtain approval for a private loan. But what hurdles must you encounter 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 repay with the refinance. Since refinancing is a free process for the consumer, lenders will want a certain amount of principal to come into their loan portfolio in order to make the transaction attractive to them. This minimum level will vary from lender to lender, but will often be around $5,000 or more.
- No bankruptcies or defaults – There may be a few exceptions to this rule, but most private student lenders will want to see a bankruptcy-free record. Since student loans come with no collateral, lenders don’t want to deal with the hassle of collecting their money if someone can’t pay their bills.
- Meet credit score requirements – Similar to the previous point, lenders will require borrowers to meet certain credit rating levels to qualify for a student loan refinance. This can usually be circumvented, however, if you have a co-signer.
- You have a job – Again, lenders do not want to refinance the loans of people they suspect of not repaying their debt. A lender will want to see that you are currently employed with a stable income.
Here are some of the main things a lender will consider when determining 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 with federal student loans will lose benefits such as loan forbearance and income-driven repayment plans if they refinance. If you plan to take advantage of it at some point in the future, refinancing may not be your best option. However, those with higher interest rate private or federal loans will likely benefit from locking in a lower interest rate.
There may be hurdles to overcome to qualify for a student loan refinance. However, once you check all of these boxes, it can greatly improve your financial health.