Finding the ideal timing for student loan consolidation or refinancing is difficult. There are a number of personal factors as well as market factors that are completely out of your control. With so many factors at play, it is difficult to pinpoint the ideal time for student loan consolidation. Instead, we will look at the many different issues that can impact your timing of student loan consolidation.
Personal Finances – One of the most important numbers in any student loan consolidation is your debt-to-income ratio or DTI. Lenders will look at how much money you make each month and compare it to your monthly bills. If your monthly budget is too tight, your application will not get approved. From a timing perspective, you will want to think about any debts that might be paid off in the near future. If you have a large car payment or debt that is about to be off the books, it might be best to wait to consolidate until after it is off your credit report.
Credit Score – Your credit score is always moving slightly in one direction or another. Slight movements will not likely make a big difference on you application. The big credit score factors are the ones you want to worry about. An account that is currently delinquent can be devastating to your credit score while one late payment from two years ago has much less of an impact. Take a look at your credit report and make sure it is accurate. If your credit score is currently a mess, now probably is not the best time to apply.
College Graduation – Many clever borrowers realize during school that the interest rates on their student loans are way too high. Unfortunately, as college students, there is not much that can be done. Most lenders will require that potential borrowers have already earned their degree before they consider a consolidation application.
Interest Rates – This is a big issue, but far from the most important one. Obviously, if interest rates are low, you want to try to refinance or consolidate your student loans. However, there is little benefit in waiting for rates to get better. This is because there is no real cost to the consolidation process. Unlike a mortgage that has closing costs in the thousands, consolidating your student loans should be free of charge (assuming you are working with a reputable lender). Thus, if you can get lower rates, go for it. If rates go even lower, consolidate again. With so many lenders offering such close rates, a borrower can easily bounce from lender to lender until they find the best rate possible.
Employment Status – Some lenders will need two years at your current job, while others will want just one. Some lenders may require even less time at your current job. The important part about your employment status is that you have a job and it is one with a salary that will allow you to easily meet your student loan obligations.
The Bottom Line
Unfortunately we cannot just say the best time is right after graduation or two years after graduation. The real answer is that it really depends. If you are on the fence, there really isn’t much of a downside to applying, the worst a lender can do is say no (drops in credit score for credit inquries are a minor factor in your credit score). If you have questions or would like to discuss your plan, stop by the student loan forums or send us an email.