Private lenders use credit indicators to determine the interest rate they’ll offer. Monitor and manage these indicators to improve your offers and earn the lowest rates.
Lower Your Interest Rate
Any time your financial situation improves, you may have an opportunity to refinance your student loans for a lower interest rate. Completing a degree, an improved income or credit score, and a new job or promotion can all influence the interest rate offers you receive from lenders.
The better your financial situation, the more likely lenders are to offer you a low interest rate. There is no limit to the number of times you can refinance your loans, so any time you improve to your financial health may be a good time to consider refinancing.
Use All Rate Reductions
Identify every rate reduction your lender or loan servicer offers. For example, a fairly common offer is an interest rate reduction along with enrollment in automatic payments. Some lenders offer rate reductions for consecutive on-time payments or for submitting additional personal or financial documentation (a recent pay stub, a transcript, etc.).
Such reductions are typically 0.25% to 0.50% each. Lenders may allow multiple reductions, meaning borrowers can earn total reductions up to 1.50% (or as high as 2.75%, but this requires refinancing with a loan that is not considered educational for tax purposes).
Improve Credit Score
Your credit score and credit history reflect your borrowing habits. If your score has recently improved, you may qualify for a lower interest rate. Activities that can improve your credit score include repaid debts, untapped credit lines, and prompt payments over the long term.
Old activity eventually disappears from your report, so financial experts and government administrators recommend checking your credit report at least once per year. Every American citizen is entitled to at least one free credit report annually.
Complete a Degree
Student loan refinance programs use your highest level of education to determine your loan eligibility. Borrowers with higher degrees have more earning potential. Lenders may also view a completed degree as a demonstration of long-term commitment and responsibility.
Borrowers with more advanced degrees are generally approved for larger loans at lower interest rates than borrowers with undergraduate degrees or no degree at all. Among the refinance lenders we’ve researched, 50% require at least an associate’s degree in order to qualify for refinancing. Those that allow non-graduate refinancing charge the highest interest rates to these borrowers.
Change in Income
Since your income directly relates to your ability to repay your loan, this is a significant factor that student loan refinance lenders to determine your interest rate. Your income can influence your rate in multiple ways.
Lenders calculate your debt-to-income ratio, which gives them an idea of how much of your income you will have to spend on loan payments. If your monthly loan payment represents a relatively low percentage of your income, you are more likely to qualify for a lower interest rate. Generally, if your monthly payment is the equivalent of 50% or more of your income, you will not be approved for a refinance loan.
If your income has become more reliable – for example, if you’ve gone from “gig” work to salaried employment – lenders will be more likely to offer you a lower interest rate as they will consider you a more reliable source of payment.
New Job or Promotion
An improved income is often the added benefit of a promotion. Even if it doesn’t include an income boost, a new job or a promotion demonstrates your ability to maintain steady, long-term employment.
Such indications of career advancement suggest greater future earning potential. If your income is low-end but you work in an industry or position with a comparatively high potential income, you may qualify for a lower interest rate.
Use a Co-Signer
Adding a co-signer to your loan may reduce your interest rate whether you have good credit or not. Co-signers are generally spouses, parents, or other family members. Any qualifying person can co-sign your loan, however.
A co-signer shares the responsibility of repaying your debt. Should your loan enter delinquency or default, your co-signer also faces financial consequences.
In many cases, refinance lenders will allow you to release a co-signer from the loan contract after a certain number of consecutive qualifying payments. Releasing a co-signer totally relieves that person from any responsibility regarding your loan.
- Consumer Finance Protection Bureau (CFPB), Debt-to-income Calculator
- CFPB, Consumer Credit Trends
- Federal Trade Commission, Consumer Information: Understanding Your Credit
- MyFICO, How Scores Are Calculated
- The University of Kansas Office of the Vice Provost for Student Affairs, Student Money Management Services
- U.S. Department of Education National Center for Education Statistics, The Condition of Education
- MPower Financing, Loan Repayment Examples