Can You Refinance Student Debt Before You Graduate?

The student debt problem in the United States could potentially become a financial crisis. More than 44 million Americans collectively hold $1.4 trillion in student debt with more than eleven percent in default or more than 90 days delinquent. Nearly half of student borrowers have to forgo or postpone major life events such as marriage, starting a family, and buying a house due to the burden of student debt.

That’s why student loan refinancing is quickly becoming a hot topic. An increasing number of student borrowers are looking for payment relief by reducing their interest costs through refinancing. Some student loan experts say that the sooner you can refinance to a lower rate, the more money you can save on the loan over time. If that’s the case, wouldn’t it make sense to refinance your loans even before you graduate?

The answer for many student loan borrowers is probably yes. The sooner you can reduce your interest costs, the faster you can start saving money. If the average rate on your existing student loan balance of $50,000 is 7 percent and you can reduce it to 5 percent through refinancing, it could save you around $50 a month over a 10-year payment period or more than $6,000 over the life of the loan. That’s money that can be put towards buying a car or a house, saving for retirement, or starting a family.

Is It Possible to Refinance While Still in School?

Refinancing before graduating may be a lot easier said than done. Student loan refinancing is done through private lenders and most of them require a completed degree before you can qualify for a new loan. Unlike a federal loan, which doesn’t take into account your credit or your ability to repay to qualify for a loan, private loans are issued based on  strict lending requirements which can include strong credit, earnings, and a low debt-to-income ratio. That would exclude just about any student graduating from college. Considering that the average amount of debt student borrowers carry out of college is $17,000 then that is the amount they are asking private lenders to loan them when refinancing.

Putting yourself in the shoes of a private lender, would you lend $17,000 to someone who has no credit history, no employment history, and no real earnings history? Probably not. That’s why most private lenders don’t do it. They need to be able to reliably predict the likelihood they will be repaid.

At the very least, a lender wants to see that you have achieved the goal for which you borrowed the money – a college degree. They also want to see steady employment and stable income. To get a new private loan with a low-enough rate to make refinancing worthwhile you would need a good credit score to qualify for the lowest possible rate.

Lenders That Do Refinance Before Graduation

There are private lenders that offer refinancing before you complete your degree. Citizens Bank, a traditional bank based in Rhode Island, will refinance school loans even if you haven’t completed your degree. However, you can no longer be enrolled in school to qualify. You must be employed and have made 12 on-time payments to be considered. They still look at your credit history, so if you’re thinking ahead you may want to check out your credit score and see what you can do to lift it up before applying. Paying down credit card debt and making additional on-time payments on your existing accounts will help. Don’t add any new credit as it can temporarily hurt your score.

Online lender Earnest may be another option for student borrowers who have yet to graduate. While they still require a college degree to be eligible for refinancing, you can qualify as long as you are scheduled to graduate by the next semester. You also need to show proof that you have employment lined up within six months after you graduate. Earnest does not factor in your credit history, instead focusing on other factors such as income, debt expense, and free cash flow to determine your ability to repay the loan. Qualifying for refinancing through Earnest could be a good move because they offer some of the most competitive rates around.

If you can’t qualify for refinancing on your own, you could enlist the help of a cosigner – a parent, relative, or anyone with good credit willing to stand in for you to qualify for the loan. You would still be the primary borrower but the cosigner would be on the hook if you fail to make your payments. Both Citizens Bank and Earnest offer a cosigner release which absolves the cosigner of any financial responsibility after the primary borrower makes a certain number of on-time payments.

Income-Based Repayment May Be Your Best Option

Alternatively, if you have federal student loans you can wait until your repayment starts after leaving school (with or without a degree) and enroll in an income-driven repayment plan. These plans factor in your discretionary income to reduce your payment amount so it is more affordable. You don’t save anything in interest costs, but it makes the loan more manageable. Once you are on one of the income-based repayment plans you are also eligible for loan forgiveness after 20 or 25 years depending on the plan. However, once you start on an income-based repayment plan your loans are no longer eligible for refinancing through a private lender.