Requirements For Student Loan Refinancing

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Deciding whether to refinance your student loans will depend on a few factors. You’ll want to investigate whether your loans even qualify for refinancing – there may be limitations, especially if your total balance exceeds a certain amount or you did not graduate from your degree program.

If your student debt is eligible for refinancing, carefully review the interest rate and terms and conditions. If you qualify to refinance your loans at a better rate and term, doing so may be a smart financial move.

7 Eligibility requirements for student loan refinancing

1. A strong credit score

In order to qualify, you will need a good credit score. Your credit history and credit score are some of the biggest influences on your eligibility for student loan refinancing. A higher credit score will help you get the best interest rates when refinancing your student loan.

If you have little to no credit history, some lenders may not approve you, but it is possible to refinance student loans with bad credit or a limited credit history. If this is your circumstance, it is critical to shop around to compare rates and terms.

You may not qualify for the lowest rates on the market, but comparing lenders can help you get the lowest rate possible. Ideally, you’ll want a credit score in the mid-600s to qualify and one above 700 to get the most competitive rate.

2. Stable income

Lenders also consider your income stability. If you don’t have a consistent income, lenders may assume that you don’t have the cash on hand to make payments on your bills. Many lenders require proof of employment and consistent income to qualify. You may use bank statements or pay stubs to provide a record of regular, steady deposits into your account.

Common reasons for fluctuating income includes the following:

• Self-employment
• Working on a contract
• Receiving disability payments
• Being employed sporadically

3. Decent debt-to-income ratio

Your debt-to-income ratio (DTI) is the percentage of your income committed to existing debt payments. The lower your DTI, the more likely you are to be approved since you have more cash freed up to stay current on your payments.

Lenders might be more cautious if you have a high DTI. Try to keep your DTI to less than 50 percent and pay off as much debt as you can right before applying for a loan or refinance.

4. Minimum refinancing amount

Each lender sets a different minimum refinancing amount, which is the smallest amount of debt the company is willing to refinance. For many, this starts between $5,000 and $10,000.

Many lenders don’t have a maximum amount, but those that do will typically set a high ceiling, like $300,000. Minimum amounts help lenders determine whether the loan will generate enough interest to make servicing it profitable.

5. A degree

Many lenders have requirements for how much schooling you’ve completed. Some require you to hold a degree to be eligible for student loan refinancing; others may be more lenient with these requirements. You can even refinance after earning an associate degree in many cases.

6. A cosigner

You may need a cosigner if you do not meet the loan requirements on your own. Lenders may require a cosigner with primary borrowers who have bad or no credit, a high DTI ratio or unstable income. Some may even require a cosigner if you are not a U.S. citizen. The cosigner legally agrees to repay the loan along with the primary borrower.

It’s common to have a cosigner for student loans since they are designed for younger individuals who may not have established enough credit history. In these cases, the cosigner is typically an older adult with a strong financial track record, such as a parent or guardian.

Check whether the lender offers a cosigner release. If the primary or student borrower makes a certain number of payments or meets credit requirements, the cosigner may be released from the loan. Companies with fast cosigner releases include Sallie Mae, SoFi and Ascent.

7. Paperwork

Once you’ve found the lender with the lowest interest rate, fewest fees and best repayment terms for your budget, it’s time to get your paperwork in order. Here’s what you’ll likely need for your application:

• Proof of employment: A recent pay stub, a W-2 and your tax returns.
• Government-issued ID: A license, passport or ID card.
• Proof of degree: A college transcript or diploma (may not be required with all lenders).
• Proof of residency: A document confirming your current address – commonly, a utility bill with your name, a mortgage statement or a bill addressed to you will suffice.
• Loan documents: Recent loan statements detailing your account and payoff information.

After you submit your application, the lender will run a credit check. If you’re approved, you’ll sign formal paperwork to transfer the debt. This usually consists of giving the lender permission to pay off your current loans for you, with you agreeing to your new loan terms, interest rate and monthly payment.

3 Alternatives to student loan refinancing

Depending on your reasons for considering refinancing, you may consider alternative routes to achieving your financial goals.

• Increase principal payments
  

  If your main motive for refinancing is a desire to pay off debt quickly, you may consider keeping your current student loans in place and simply paying more toward the principal balance each month. This can help you to reduce the amount of time you’ll spend in repayment while minimizing the amount you’ll pay in interest.

• Explore repayment options
  

  If you want to refinance with the goal of reducing monthly payments, you may be able to accomplish the same result while keeping your loans with the same servicer. If your debt is in the form of federal student loans, you should have some flexibility to select a repayment plan that works for you. Even if a private servicer holds your debt, some allow you to select an extended repayment term to lower monthly payments.

• Look into forgiveness programs
  

  If you have federal loans and are a teacher, healthcare professional, or nonprofit employee, you may qualify for a public service loan forgiveness program. Similarly, students who have become disabled, been misled by a for-profit institution or whose alma mater has closed may be eligible for student loan discharge programs.

Bottom line

Choosing to refinance may lower your interest rate and monthly payments, as well as allow you to find terms that fit your situation. By making sure you meet the requirements for student loan refinancing, it now makes sense to start shopping for a refinance loan.