Most student loan borrowers can benefit from refinancing their student loans. Since refinancing is a fairly new offering, many people are not aware that with very little effort, you can lower your interest rate and get out of debt faster. Here are some tips to get your interest rate as low as possible.
Having excellent credit is usually the largest factor that lenders consider in determining your interest rate. Traditionally, it has been measured by Fair Issac and Company, most commonly known as FICO. Your FICO score is a number which represents your creditworthiness – essentially, it is an algorithm of your borrowing history. While there are many free services to check your credit, most lenders will pull reports from TransUnion, Equifax or Experian. Your credit score may differ between credit bureaus, so try to check your credit with each individual bureau to obtain the most accurate FICO score. Once you have an idea of your credit score, you can use our Find My Rate app to see what rate you may qualify for without starting an application.
We have covered this topic before, but it’s the most common reason borrowers get denied. A high DTI (perhaps surprisingly) is not always caused by student loan debt – credit card debt is usually the biggest reason someone is turned down. Paying down your credit cards before refinancing can help increase your chances of approval. Develop a plan to maximize your monthly payment and pay down your debt before refinancing if you think this could be a problem. You can calculate your DTI through calculators at Zillow or Bank Rate to track your progress. Most experts agree that a DTI below 36% is ideal, but as long as you can keep it below 40% you are in good shape. If you know you will be getting a raise or a promotion in the upcoming months, wait to apply until your income increases to help lower your DTI.
It’s important to know the interest rates you qualify for on your own before asking someone to cosign. Don’t assume you will need a cosigner just because you have one on your student loans now. If you have a cosigner, we use the higher credit score between both applicants to determine the interest rate. For example, if your score is 720, and your father’s score is above 800, it may be worth asking dad to cosign as you’ll be offered a more competitive rate. We have addressed the pros and cons of cosigners before, but it’s best to use a cosigner if you can’t qualify on your own or to substantially lower your interest rate.
Variable rates are typically lower than fixed rates, but keep in mind that variable rates are tied to a factor you can’t control – market fluctuations. At PenFed, we use the LIBOR (London InterBank Offering Rate) index, plus a fixed margin, to determine one’s rate. The rate can change monthly based on the LIBOR index. If you have a shorter loan term, a variable rate can potentially save you more money than a fixed rate, but there’s certainly some risk involved. If you have a longer term, the variable rate could increase significantly over the life of the loan to the point where you are paying more than you would have paid with a fixed rate. If there is only a small difference between the rates and you’re considering a longer term, go with the fixed rate. Another benefit of a fixed rate is just as it seems – your rate is locked in and won’t increase for the life of your loan. Whether that’s 5 years or 12 years, you know what you will be paying every month until you are debt-free.
If you can afford the monthly payments, a shorter term will get you out of debt faster and save you the most money on interest. Our most popular term is the 8-year term, which is unique in the student loan refinancing space. Timing is probably the most difficult factor to determine because no one knows if rates are going to rise. Although we are currently in a low interest rate environment, there is not a perfect time of the year or day of the week to refinance your loans. Once you are ready to refinance, go ahead and apply to start saving on your student loans sooner rather than later.
Many student loan borrowers are responsibly paying back their loans every month without realizing that they could get out of debt faster by refinancing their student loans. Federal loans have many benefits, but an opportunity to lower your interest rate and get out of debt faster isn’t one of them.