Refinancing Your Student Loans? Use this Checklist to Save the Most Money

By
Teresa Ruiz Decker
,
October 2, 2018

There's a reason refinancing student loans is growing in popularity—borrowers are discovering just how much money they can save on interest.


Since 2012, graduates have saved a projected amount of more than $4.5 billion by refinancing over $20 billion worth of student loans. These billions in savings come from the fact that graduates can get a lower interest rate on their loans.


Refinancing can mean lower and simpler monthly payments for borrowers coupled with more flexible loan terms. In fact, people who refinance with CommonBond could save thousands over the life of a loan.


If you want to save money on your student loan payments, refinancing is worth looking into. But how can you be sure you'll secure a lower interest rate?


We've put together a brief checklist to shed some light on how to lower your rate when you refinance—and how to make your loan work for you.


Remember, even if you don’t meet all the criteria on this list you might still be able to refinance and get a lower rate, then refinance again and lower it even more down the line.


1. Do your research


Before anything else, take some time to understand what refinancing might mean for your student loans.


Explore the impact refinancing will have on your monthly payments, your monthly budget, and overall long-term financial goals. This big-picture thinking will put you in the right mindset to start researching the loan terms offered by student loan lenders.


Once you’ve read up on your options, decide if you will apply to one lender with whom you are comfortable or shop around to compare rates. Multiple credit inquiries within in a short time frame (roughly 14 days) won't hurt your credit.


2. Know your credit score


Americans are entitled to one free credit report each year from each of the three major credit bureaus. Keep in mind, the credit reports are free but viewing your credit score isn't—there's a fee for that.


That being said, if you haven't checked your score in a while, you'll want to see where you are at before refinancing. Go to Annualcreditreport.com to view your free credit report and decide whether or not to purchase the score.


While your credit score isn’t the only factor in determining your interest rate, your score does play a significant role.


3. Pay down debts


While paying down debts won't necessarily improve your credit score, it can impact your debt-to-income ratio.


Your debt-to-income ratio is all of your monthly debt payments divided by your gross income. Most lenders use this to measure your ability to make payments on the loan you are applying for, so you'll want to keep your debt-to-income ratio on the lower side.


4. Get creative about increasing your income


If you already work full-time, you may feel like adding more work to your life is nearly impossible—but you may have some options.


You can ask for a raise, or maybe carve out the time to freelance on the side. Selling things online, sharing your car, or renting out part of your home can up your income, too.


If you increase how much you earn, be sure to list every possible source of income on the application to better highlight your financial stability.


5.  Find a cosigner to help (just in case!)


A cosigner with a strong credit score can improve your chances of a lower interest rate and  you can always opt to release your cosigner at a later date.

6. Create a backup plan


If you don't get the rate you would like the first time, you can still refinance now and choose to refinance again for a lower rate loan in the future. Decide what actions you can take between now and then to improve your chances of getting approved with the lowest possible interest rate.


Bonus Ideas: Save with a Variable-Rate Loan or Shorter Loan Term


Staying open to money-saving strategies like variable-rates loans is also important to consider as you work through the refinance process.


You'll notice variable rates tend to be lower, while fixed rates are slightly higher. If you're open to a variable rate, you can secure a loan with a rate as low as 2.72% at CommonBond. Comparing that to the 4.45% interest rates for fixed undergraduate Federal Loans disbursed in the 2017-18 academic year makes it easy to see why variable rates are worth considering.


Keep in mind, while you may experience savings with a low rate in the beginning, variable loans rates are designed to increase over time. For that reason, variable loans are preferable if you need a lower interest rate in the short-term. This type of loan, for example, can be a good fit for grads with an aggressive payoff plan.


If you're uncomfortable opting for a variable loan, see if your lender provides alternatives. CommonBond's hybrid-rate loan starts off as a fixed loan for the first five years and moves into a variable rate for the last five years.  


Don't forget you can also save on interest if you select a shorter loan term. Your monthly payments will be higher, but this could be a good route if your goal is to save as much as possible on student loan interest payments.


You may also choose to prepay your loans (i.e., pay more than your monthly bill) to save on interest payments in the long run. It may seem hard to put extra cash toward lowering the principal owed on your student loan but it may be worth it if it will get you that much closer to your goal of paying off student loans for good.


Final Thoughts


While every loan application is unique, using this checklist as a guide to prepare for your student loan refinancing will put you in a better position to get a lower interest rate when you are ready to apply.  


In the end, knowledge is power—so before you apply, make sure you’ve got a clear picture of where you stand financially to set yourself up for success in your student loan payoff journey.


​​​​​​​​​Want to learn more about refinancing? Get more information about CommonBond's refinancing options here.

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