When you already have private student loans, refinancing can be a great way to reduce your cost over time if you can obtain a lower interest rate. If you have federal student loans and you are wondering if refinancing into a private loan makes sense for you, refer back to my previous blog on Fed Loans vs. Private Consolidation Loans.
Before you even begin to look at refi options, you need to have an idea of what your credit looks like. You need to have STELLAR credit for a successful refi - a lot of times the advertised, super-low interest rate for student loan refinancing is very difficult to get approved for. The average credit score needed to be even be approved in 2018 was a FICO score of 764... so if you don't have a score in that range, be prepared get declined altogether.
If you are unsure where you stand, pull your credit report from www.annualcreditreport.com
to review the guts of your information. If your credit cards have high balances and are close to their max limit, or you have any "Adverse Accounts" in collections, or late payment history... you may need to clean things up before considering a refi.
If you think your credit is in good order, look into refi brokers or websites that will compare multiple companies and rates with one soft inquiry. Here are a few to consider:
Once you have found a broker/lenders to explore, find out your pre-qualified rate through a soft inquiry. Unlike hard inquiries, soft inquiries won’t affect your credit scores since soft inquiries aren’t connected to a specific application for new credit. The difference between a hard and soft inquiry generally boils down to whether you gave the lender permission to check your credit. For a soft inquiry, you will need to provide basic information on your financial situation (income & rent/mortgage responsibility), your existing loan balances, purpose for wanting to refi, and information on your school/graduation/degree.
If your pre-qualified rate/range looks to be promising (lower than your current rate), go ahead and formally apply with that specific lender (hard inquiry). Ideally, choose a lender that does not charge a refinance fee, and allows you the flexibility to choose your terms. Make sure you read ALL THE FINE PRINT. Things to look for:
No refi fee
No pre-payment penalty - allows you to accelerate payments if desired
Co-signor release clauses - if you have a co-signor
Fixed interest rates - my preference
If you are declined, check 1 or 2 other lenders in the same sitting. Credit Karma says: "FICO may record multiple inquires for the same type of loan as a single inquiry as long as they’re made within a certain window (usually between 14-45 days). The VantageScore model gives you a rolling two-week window to shop for the best interest rates for certain loans." Either way, a hard inquiry could lower your scores by a few points, but in most cases it is unlikely to play a huge role in whether you’re approved for a new loan and the damage to your credit scores usually decreases or disappears even before the inquiry drops off your credit reports for good.
To show the impact a lower interest rate can have on the trajectory of your debt reduction strategy, I will use a client's recent success story as an example.
Client felt as if the debt balance was staying stagnant, even though payments had been made 1) on-time each month 2) at the requested amount and 3) for the past 4 years
Client wanted a more efficient repayment plan
Client had 5 separate private student loans with Navient, all with different interest rates. See the Debt Organizer below:
The minimum payment required only had about $62 currently going to the actual principal... no wonder the balance seemed to stay stagnant! Without a refi, continuing to pay the loans at $325/month this way would have the following schedule (assuming no acceleration at any point):
Yikes... The total interest paid over time on top of the actual balance would be $30,320.44! And this strategy would take another 15 years to be totally done with the debt! This was not going to be an efficient repayment strategy, and accelerating past the $325/month was not an option in this client's cash flow currently, so we looked minimize the interest charge over time by exploring a refinance.
We used Nerd Wallet for the soft inquiry to compare 8 different lenders at once. The client was prequalified for a range well below their current 9.63% - 12% interest rates so next step was to formally apply with a lender. The first company declined the refi application. The client did a second application with Earnest and got approved for a fixed 5.49% (with auto-pay elected).
Earnest allows you to choose from a range of terms, so the client chose the shortest time frame option of 12 years with a payment amount of $265/month, with plans to accelerate the payment to the $325/month they were already used to.
Below are repayment scenarios with the new approved rate:
*The 10-day pay-off balance for Navient was $28,342.98, so that is where the new balance for Earnest starts at.
Assuming the client paid JUST the required $265/month, the new pay-off date would be July 2031 - 3 years earlier than the pre-refi schedule! But the BEST part is the amount of total interest paid is 1/3 of what is would have been before!
If the client decided to accelerate the payment slightly at $300/month, the pay-off date is August 2029, and again, the interest charge over time drops.
Let's say the client stays on track with keeping their original $325/month payment, which would accelerate the new loan by $60/month ($325 - $265) - this would have them out of debt in less than 10 years and have an even lower interest charge over time. Between the above strategies, this approved refi SAVES the client between $20,000 - $23,000... and even more if they accelerate past $325/month.
Speak to a Certified Student Loan Professional™ to see if a Private Refinance is right for your student loan repayment plan.
Meagan Landress, CSLP®
Certified Student Loan Professional™
Financial Coach Meagan