3 Secrets to Refinancing Graduate School Loans
Early this week I posted about why I chose to refinance my $190,000 in student loans.
Disclaimer: Deciding to refinance your student loans is a personal choice and your best option if you’re unsure what to do is seek out advice from a flat fee certified financial planner.
For most graduates with higher incomes, I believe that student loan refinancing is nearly always the best option to tackle this debt. That said, many lawyers prefer the perceived protections of federal loans, which can be placed on income-based repayment plans should unemployment or salaries drop. Lawyers working in public service may feel that the Public Service Forgiveness Plan is the best option. Perhaps I don’t have a lot of faith that the government has my back (see: 7.9% interest rates on graduate school loans), but also because I just really don’t want to pay 300 loan payments that come with a federal repayment plan (and Public Service Forgiveness is not an option for me).
How do you improve your chances of successfully refinancing your student loans?
1. Check Your Credit Score
First, you need a solid credit score. It doesn’t have to be over 700, but I’ve found that a lot of lenders are looking for the high 600s as a minimum. The better your credit score, the better your rate. Go to Credit Karma and check your credit score. Credit Karma will tell you if there are any issues that are pulling your score down, such as missed payment or bill that was sent to collections. It’s not uncommon to have errors, and these need to be fixed. Luckily, Credit Karma has options for reporting inaccurate information or tips for removing old delinquencies (like that $40 cable bill you forgot to pay six years ago and is now taking 100 points of your credit score).
2. Don’t Buy A Car or House
When you refinance your loans they look at your debt-to-income ratio. As the name implies, a debt-to-income ratio is the percentage of your income that is committed to debt payments each month. Lenders typically like this to be less than 40%. So, for example, if you make $100,000 a year and have a car loan of $500, you have a debt-to-income ratio of 6% ($100,000/12 = $8333/month, $500/$8333 = 6% of your monthly income goes to debt repayment). Because lenders typically will only loan up to 40% DTI, this particular borrow only has about $2833 each month that can be used for loan payments. Buying a home with a monthly mortgage of $1833 would reduce the amount of income available to $1000. For the typical law graduate with $140,000 in debt, this means the best refinance option available to them would be 18 years at an average of 5.25%. The same individual who did not buy a house but rented an apartment for $1000/month would have $1833 available for loan repayment. This results in a loan payment of $1789 for 8 years at 5.25%. You cut 10 years off your repayment plan!
But perhaps you plan on sharing that home with a roommate so that your actual housing expense is around $950? That’s a smart move. But be aware that the various student loan lenders may not count your roommate’s income in their calculation of your debt-to-income ratio. Over the past four years, I’ve purchased four homes while also refinancing my student loans 5 times. Every time I’ve had a student loan refinancing denied (it happens!) was because I had just purchased a home.
My best advice if you plan to buy a home is refinanced your student loans first, then buy. But, of course, be aware that student loan payments will affect the amount that you can qualify for with a home mortgage. (Sometimes it seems you just can’t win, huh?)
3. Check Rates with Multiple Student Loan Refinancing Companies
There are a lot of banks in the student loan game. Two that I have personally refinanced with are Earnest and Sofi. While the underwriting criteria are similar, I’ve found major differences between being approved versus denied for refinancing, as well as your ultimate rate. Check your pre-approval will not affect your credit score, so it’s worth taking a look at multiple banks to figure out the most competitive option.
Bonus Tip: Pass the Bar Exam.
This one is for other lawyers. Most student loan refinancing companies require that you pass a bar exam and have a job offer in order to refinance your loans. I would imagine there are similar requirements for other professionals that require certification. Not to add stress to an already stressful process, but realize that you need to get through the bar exam before you refinance your loans.
Finally, if at first you don’t succeed, then try, try again. High interest rates will kill your ability to pay off student loans. A common issue for a declined refinance application is a low credit score. Work diligently to improve your score (typically by paying down credit card debt and removing delinquencies) and then apply again in 3-6 months.
Have questions about refinancing? Comment below and let’s talk about it!
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