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Today in America, there are over 44 million of us with student loans; adding up to a staggering $1.5 trillion of debt. To explain just how massive $1.5 trillion is; you could give every man, woman, and child in this country $1,000, fully fund the $68 billion annual budget of the Department of Education, and don’t forget about the $700 billion annual budget of the Department of Defense and for fun lets give out another $1,000 to every american, cause why not. Oh yea and there still would be billions left over, about $82 billion to be precise. So yea the student loan crisis in america is massive.
Starting our lives by paying $300, $500 or even $1,000 a month in student loans, instead of saving towards a home or your retirement, creates significant financial problems. Specifically for Millennial’s (born from 1980 – 1994) and those in Generation Z (born from 1995 – 2012), who are more likely to have student loans. The student loan crisis not only affects young people. Often our loving parents want to help us, and by doing so, either delays their retirement or drains their savings. The good news is there are several things we can do to tackle this crisis. Thanks to a generally low-interest rate environment that currently exists, we can refinance our loans at a materially lower interest rate. Also, Corporate America has taken notice of this crisis, and have reshaped their benefits to help their employees pay off their loans.
Let’s Talk About Your Credit Score
We can’t talk about student loan refinancing without first discussing your credit score. Your credit score is an indication of your financial responsibility. Napkin Note: Credit Scores range from a minimum of 300, to a maximum of 850. If you want to refinance your student loans, you will need at least a 650 or higher for most lenders. Credit Karma is a great tool you can use to monitor and track your credit. It's a free app, and if you're crazy about checking your credit like I am, you can check it as often as you like without hurting your credit score. If your credit score is below 650, don't worry, you can improve it over time if you follow these simple steps:
· Pay off your credit cards in full each month.
· Settle all your late payments.
· Low Debt-to-Credit Ratio.
· Do not open accounts that require a credit check.
· Take a deep breath and relax. Improving your credit takes time, but if you follow these five steps, it will grow.
Your Debt-to-Credit Ratio is simply a ratio expressed as a percentage, where lenders measure how much credit you use against your total credit limit. In other words if you have a credit card limit of $5,000 a month and you spend $2,500 a month, then your Debt-to-Credit ratio is 50%. To improve your credit score, keep this number at or below 30%.
If you apply with a low credit score, you will almost always be denied unless you have a qualified co-signer. A qualified co-signer is someone with a strong credit score (over 680), has a low debt-to-credit ratio, has considerably larger income than you, and less debt. The best co-signers are usually family members, because let's be honest, no one else would do it. This co-signer will be on the hook if you fail to make a payment and will damage their credit if they do not cover your payment. So now you know how to improve your odds of being approved. Let’s review the steps on how to refinance your student loans.
Step 1: Shop Around
With so many lenders offering different interest rates and repayment terms, it’s important to review several of them to ensure you receive the lowest interest rate. The four lenders I recommend are LendKey, Earnest, Commonbond, and SoFi. These lenders offer competitive rates and have excellent customer service, which makes the process less stressful. These lenders can pre-approve you in seconds by running a soft credit quick, and best of all it won’t impact your credit score. To check if you’re eligible, you will need to provide the lender with the following information:
Social Security Number (Again this will not affect your credit score)
You will find out in seconds if you are pre-approved and be presented with options like, how many years do you want to pay off your loan (repayment terms), and fixed or variable interest rate. If you are unfamiliar with fixed versus variable rate, read my post called “Everything Mortgage." While the lender will show your savings from the refinancing, I would recommend using this student loan refinancing calculator to confirm your savings.
Step 2: Fill Out the Application and Apply
At this point, you have chosen a lender, a new interest rate, repayment term and are ready to complete your application. This is where you upload loan documents and have a hard credit check, which does affect your credit score. Below are the item’s most lenders will ask for:
· Social Security Number
· Driver’s License or Passport
· Proof of Income
· Letter of Employment
· Federal and Private Loan Documents
In addition to reviewing the above items, the lender will compute your Debt-to-Income Ratio. This ratio is a number comparing your overall debt to income, expressed as a percentage. For example, if you spend $2,500 a month (comprised of credit cards, a car payment, and student loans) and earn $5,000 a month from your job, your Debt-to-Income Ratio will be 50%. Napkin Note: Try and keep this as low as possible to improve your chances of being approved by a lender. 30% should be your goal.
While you are in the process of being approved, keep paying off your original loans until your new lender tells you otherwise. This process can take a few weeks, so please be patient. If you are approved, some lenders will allow you to reduce your interest rate by an additional .25% when you set up auto pay. Please be sure to take advantage of this additional benefit.
Step 3: Pay It Off Faster
If you have some extra money at the end of the month, receive birthday money, a tax refund or get a pay raise at work, make an additional payment. When you make an extra payment make sure you contact your lender and inform them you want the payment to go towards principal only. If you make the payment without telling your lender, they will treat it as an early payment for the following month, which includes interest. Lenders will not charge you a fee for making extra principal payments.
Corporate America has been paying attention to the student debt crisis in America and has begun adapting their compensation packages to help their employees pay down their student loans. The list below is just a few of many companies that will help.
If you are already employed, check with your HR department to see if your company will help you pay off your student loans.
I hope this post helps you save money so you can begin saving for a home and retirement and really anything else besides student loans. I am super excited to hear from you about how much money you have saved by refinancing your loans.