Student loan debt can be crippling to your financial plan. It makes it harder to save for the future and sometimes even difficult to just get by in the present.
With student loan refinancing, you can get more flexibility with your payments and potentially even lower your interest rate.
Low interest rates aren’t available for just anyone, though. Here are five steps to getting the best that student loan refinancing companies offer.
1. Increase your credit and income
If you have bad credit, you likely won’t get approved to refinance your student loans, let alone get the best rates. Many lenders require a FICO credit score of at least 660 to qualify, even with a cosigner.
If your credit score is down in the dumps, use these tips to get back on track toward establishing a strong credit profile. It will take time, but the money you’ll save will be worth it.
Your income is also a big factor because the lender will look at your debt-to-income ratio, or how much you pay toward debt every month relative to your monthly income.
Each lender has different minimum requirements for income, but the higher, the better. Increase your income by taking on a second job, working overtime, or starting up a side hustle.
Check out these 10 side jobs that you can start today.
2. Shop around for the best student loan rates
There are scores of lenders out there who can refinance your student loans, but the best refinancing lenders generally have the lowest interest rates and the best features.
Take your time to compare the different options. Look at their rates, fees, and other terms that are important to you.
“With most federal loans, we see interest rates hovering around 6.80% and private loans higher,” says Adam Vega, a Certified Financial Planner at United Capital Financial Advisers. He adds, “If you can qualify for a refinance in the 5-6% range, that can equate to thousands saved over the life of the loan.”
Some student loan refinancing lenders allow you to pre-qualify, which lets you see what rates you may qualify for without getting a hard inquiry on your credit report. Do this with as many lenders as possible to get a ballpark figure of what you’d qualify for.
Then, consider applying with a few to get their final rates based on your full credit profile.
3. Apply for a student loan with a cosigner
Even with stellar credit and a solid income, it’s unlikely you’ll qualify for the best student loan refinance rates without a cosigner on the loan.
The ideal cosigner would preferably be someone who also has a great credit history and good income. The idea is that you’re much more likely to pay back the loan on time if someone with a good financial foundation cosigns on it.
Of course, cosigning a loan can be a tough decision. The person who applies for the loan with you will be fully liable to pay it back if you default. It can also make it difficult for them to apply for credit in the future, especially if you’re refinancing large balances.
The good news is that some student loan refinancing companies offer what’s called a “cosigner release.” What this means is that after a certain period of consecutive on-time payments — say, 12 or 24 months — you can request that the lender remove the cosigner from the loan.
“On LendKey, cosigners can be released from the loan after just 12 payments, so it doesn’t continue to be a burden for them,” says Devin Hughes, director of business development at LendKey.
He adds, “Assuming the borrower can qualify for minimum eligibility on their own, they would get to keep the rate they were offered when they had the cosigner.”
4. Set up autopay
Making automatic payments not only ensures that you don’t forget to pay every month, but it’s also good for the lender because it means you’re more reliable.
Because the lender wants to minimize late payments and defaults, many of them reward you for setting up autopay, usually with a 0.25% reduction in your interest rate. That’s not a lot, but the savings will add up over time.
For example, say you refinance $40,000 at 4.25% for 10 years. Your monthly payment would be $410 and you’d pay $9,170 in interest over the life of the loan. If you set up autopay for a 0.25% discount, your monthly payment would be $405, and you’d pay $8,598, a savings of $572.
5. Choose a fixed rate
The lowest advertised refinance rates are usually variable rather than fixed. This means that, if market interest rates go up, so does your interest rate.
The Federal Reserve has raised the federal funds rate twice already in 2017, and most experts expect to see more rate hikes in the future. As such, going with the lowest rate available may mean you’ll pay more interest in the long run.
Instead, opt for the lowest fixed interest rate. Doing this will protect you from future interest rate fluctuations.
Now that you know how to get the best student loan refinance rates, take a look at your credit to see where you stand. Then start looking at different refinancing lenders. Because a lower interest rate would have more benefit over time, the sooner you start the process, the better.
If you’re able to refinance your student loans at a lower interest rate, you’ll be able to pay off the debt faster and with less interest over time. That means more money to do the things that you want to do now, rather than paying off something from the past.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.