How to improve your finances to refinance student loans

Refinancing your student loans can be a smart way to lower your interest rate and, hopefully, your monthly payment.

After all, student loan interest rates have dropped in recent months, now hovering in the 3-4% range. According to the loan comparison tool Credible, rates on 10-year fixed-rate loans dropped 26% between July 2018 and July 2019. On variable-rate loans, rates fell even further, decreasing 37% over the year. Of course, those 3-4% rates are only available for the most qualified borrowers.

Don’t fall into that category just yet? Here’s what experts say you can do to improve your student loan refinancing options.

• Step 1: Increase your credit score
• Step 2: Pay down your debts
• Step 3: Increase your income
• Step 4: Report errors on credit reports
• Step 5: Bring in a co-signer
• Step 6: Shop around

Step 1: Increase your credit score

Boosting your credit score is one of the best ways to improve your refinancing chances, according to Nick Sky, co-founder of ChangEd, an app aimed to help student loan borrowers pay off their debts faster.

“Every lender has their own qualifications,” Sky said. “Some require a credit score of 720 or above, while others work with community banks and credit unions who have less strict underwriting requirements. In most cases, borrowers looking to refi should have a credit score of 670-plus.”

HOW TO INCREASE YOUR CREDIT SCORE FAST

If your score isn’t quite there yet, there are a few things you can do to help. First, keep paying your bills on time, every time. Payment history is one of the biggest contributors to credit score. You can also ask for a credit line increase — but don’t use it — and pay down some of your higher balances. These will all give your score a boost over time.

Step 2: Pay down your debts

Your debt-to-income ratio — or how much of your monthly income your debts take up — is another big factor in refinancing. A lower DTI typically means an easier qualification process and lower rates, while a high DTI means the opposite.

Kevin Walker, CEO at CollegeFinance.com, recommends waiting until your DTI is under 40% to refinance your student loans. “This means managing your monthly debt payments — including your future student loan refinance payment — to a point below 40% of your gross monthly income,” Walker said.

Paying down your balances can lower your DTI, as can increasing your income (more on that later). Consolidating your debt might be able to help, too. This allows you to roll all your debts into one, potentially lowering your interest rate in the process.

HOW TO PAY OFF DEBT FAST

Step 3: Increase your income

You can also improve your DTI by increasing your income. Asking for a raise or pay bump is one way to achieve this, or you can take on a side gig, like driving for a delivery service, shopping for apps like Shipt or Instacart, or even just taking paid, online surveys.

Any increase in income will lower your DTI and better your chances of getting a low student loan rate.

Step 4: Report errors on credit reports

Errors are common on credit reports. A creditor might report an incorrect balance or mark a payment as late when it’s not, or there could even be an account you don’t recognize on there. Whatever the error is, it can hurt your score — so recognizing and reporting them is critical.

Here’s what Mark Kantrowitz, vice president of research at SavingforCollege.com, recommends doing: “Check your credit history with each of the three credit bureaus: Experian, Equifax and TransUnion. You don't know which of the three credit bureaus will be checked by the lender. Then, correct any errors by disputing them. Creditors have 30 days to either confirm or remove the inaccurate information.”

Though consumers technically only get one free credit report from each bureau annually, credit bureaus have waived this rule in light of the pandemic. You can now check your report weekly, free of charge, until mid-2021.

HOW TO GET A FREE CREDIT REPORT

Step 5: Bring in a co-signer

If all else fails, bringing in a co-signer for your refinancing efforts can help. Make sure you choose one with a good credit score and low DTI, as these will improve your application and your shot at a low rate.

HOW TO FIND A COSIGNER FOR A LOAN

Step 6: Shop around

When comparing your options, have a student loan refinancing calculator on hand to gauge what each loan’s monthly payment would be, as well as how much it will cost you over time.