Student loan debt has become an absolute disaster for many Americans who chose higher education with the goal of improving their lives. In fact, over 43 million adults owe on their student loans today, with a cumulative debt that is well over $1.5 trillion.
Since it’s nearly impossible to discharge student loan debt in bankruptcy, unlucky borrowers with crushing debt levels have few options when it comes to finding a way out. They can pay off their loans the hard way, and there are federal repayment programs that can help ease the burden for those with federal student loans.
Students can also choose a different repayment timeline with federal loans or apply for certain types of employment that can help them qualify for forgiveness programs like Public Service Loan Forgiveness (PSLF).
Some borrowers can also benefit from refinancing their student loans with a private lender, but there are some pitfalls with this strategy, too. You’ll lose out on some federal protections when you refinance federal loans with a private lender, and there are steeper requirements to get approved.
If you are considering refinancing your loans with a private lender to get out of debt faster or make repayment easier, here are some signs you may be on the right track.
1. You have an excellent credit score
While anyone can qualify for most federal student loans regardless of their credit score, most private student loans have stricter requirements. In fact, you typically need very good or excellent credit to qualify for the best private student loans, which typically means you’ll need to have a FICO score of 740 or higher.
Not all private lenders list a specific credit score requirement, however. SoFi, for example, requires you to meet citizenship requirements, have a job, and have graduated from school with your degree. In terms of their credit requirements, they simply state that “loan eligibility depends on a number of additional factors, including your financial history, credit score, career experience, and monthly income vs. expenses.”
In most cases, however, you’ll need to have good credit to refinance with a private loan, or have access to a cosigner willing to be on the hook for repayment along with you. (See also: 3 Private Lenders That Can Really Save You Money on Your Student Loans)
2. You have no plans to take advantage of federal student loan benefits
One major downside that comes with refinancing federal student loans with a private lender is that you’ll be effectively “giving up” federal loan benefits like deferment and forbearance. You’ll also give up your shot at qualifying for income-driven repayment plans, which can help you secure a lower monthly payment for 20-25 years before leading to ultimate student loan forgiveness.
For that reason, refinancing with a private lender is usually best for borrowers who have no intention of using these benefits or needing to extend repayment by a decade or more to afford their loans. (See also: Should You Refinance Your Student Loan?)
3. You want to consolidate your loans
If you have multiple student loans, you may want to consider consolidating them into a single new loan with one monthly payment. You can accomplish this goal with a federal Direct Consolidation Loan, but you can also consolidate multiple student loans — including both federal and private loans — with a private lender.
The benefit of consolidating loans with a private lender is the fact that you may be able to qualify for a lower interest rate. (See also: What’s the Difference Between Student Loan Refinancing and Consolidation?)
4. Your interest rate is high
Speaking of interest rates, this is one area where private student lenders can really shine — particularly if you have good credit. Federal student loan rates tend to be on the low side, but private student lenders still offer the better deal. (See also: This Is How Student Loan Interest Works)
5. You need a lower monthly payment
Refinancing your student loans can help you accomplish several different goals. You can save money on interest by securing a lower interest rate, for example, but you may also be able to pay down your debt faster.
In some cases, it can also make sense to score a lower rate but extend your repayment timeline. The lower interest rate and lengthier repayment period can leave you with a lower monthly payment amount, which can help immensely if you are working toward earning a higher income or you need to save money to fund a goal like starting your own business. (See also: How to Manage Student Loans On a Low Income)
6. You have a stable income
You do need a stable income to qualify for private student loan refinancing, which is vastly different from federal student loans that don’t require an income at all. Private student loan refinancing is only available to people who have graduated with their degree in most cases, have a job (or a job lined up), and have provable income they can use to repay their loans.
If you don’t have a big income, you may want to wait until you’re in a better, higher-paying job before you apply for private student loan refinancing. (See also: Which Student Loan Repayment Plan Saves You the Most?)
The bottom line
Private student loan refinancing isn’t for everyone, but it can be a boon for your finances if you’re the right type of candidate. If you want to pay off your student loans faster, have good credit and a high income, and you have a solid credit history, you may want to explore private lenders to see how they stack up.
Just make sure to consider all the pitfalls, including the fact you’ll no longer qualify for federal student loan benefits. This trade-off can be well worth it, but only if you have a plan.