This student loan move could save you thousands
There may not be a magic bullet for getting out of student loan debt, but there is a holy grail, of sorts, for some borrowers:聽.
Here鈥檚 how it works: If you qualify, a lender will buy your existing loan, or loans, and issue a new one. Depending on your credit, you could get a lower interest rate, which would save you money in the long run.
Say, for example, you left college with a $30,000 private student loan with a 7% interest rate and a standard 10-year loan term. If you refinanced that loan right away at 3.5%, you鈥檇 save more than $6,000 in interest over the life of your loan. You could use the money to start an emergency fund, save for retirement or go on vacation.
Here鈥檚 what you need to know about refinancing your student loans.
How to qualify
In general, you鈥檒l need three things to qualify:
- Solid credit score: Most lenders require a score of 700 or higher. If your score is lower, you can apply with a co-signer whose score qualifies.
- Low debt-to-income ratio: The lower your debt is in relation to your income, the better. Aim for a ratio that鈥檚 lower than 50%. For example, if you make $60,000 a year, your total debt should聽be below $30,000.
- Steady source of income: Borrowers with traditionally stable,聽聽will find it easier to qualify. Freelancers and those who are between jobs will have a harder time qualifying.
How to make it work
Refinancing is a great option for borrowers who have private loans with high interest rates. Federal loans also can be refinanced, but you鈥檒l lose access to federal loan protections, such as聽听补苍诲听. That鈥檚 why it鈥檚 usually best to exclude federal loans during refinancing.
Nerd Tip:聽If a lender offers prequalification, you might want to go through that process to get an idea of how much you could save without having a hard inquiry on your credit history, which lowers your credit score.
To determine if refinancing is a good option, compare your current loan terms against your potential loan terms. You鈥檒l save the most money by getting your interest rate as low as possible. Consider other aspects of your loan as well to get the full picture. For example, if you have a loan with a 6% interest rate, refinancing it at 5% would聽make sense only if you didn鈥檛 have聽to extend the loan term.
鲍蝉别听聽to estimate聽your potential savings and see if refinancing is right for you.
If you don鈥檛 qualify
You can use a co-signer if your own credit score isn鈥檛 700 or above. But if you鈥檇 rather refinance on your own, focus on paying your bills on time and reducing any credit card debt to boost your credit score before applying.
.
If refinancing makes sense and you鈥檙e willing to make the effort, it could help you save thousands of dollars in interest payments over the life of your loan. That鈥檚 at least worth considering.
Devon Delfino is a staff writer at NerdWallet, a personal finance website. Email:聽ddelfino@nerdwallet.com. Twitter:聽.
This story originally appeared on .
