Opportunities for student borrowers to get new terms on their debt have surged in the past few years. But there is still a lot of confusion about who really qualifies for refinancing and if it is a good idea.
There is actually no way to refinance your federal student loans within the federal system. So if you refinance, you forever give up access to certain benefits that are only available to federal loan borrowers – a cautionary you will get from just about every student loan expert.
For instance, you will not be able to access the income-driven repayment plans provided by the federal government. These plans, not only offer loan forgiveness after 20 years but also provide protection in the event of a job loss or pay cut and set your monthly bill according to your salary. You will also not be eligible for public service loan forgiveness, which actually discharges an outstanding debt of government and non-profit workers after 10 years of payment. And you will likely be unqualified for federal benefits introduced in the future as well. (The Bank of North Dakota has a good overview of these and other federal benefits.)
Once you’ve examined the risks, here is how to decide whether refinancing makes sense for you.
Will You Even Qualify?
Refinancing so far has largely been available only for a small number of borrowers – those with lucrative degrees, super-prime credit, six-figure salaries, and of course large debt loads. In fact, one of the biggest criticisms of renowned refinancing companies, including CommonBond and SoFi, is that they actually cherry pick the absolute safest borrowers.
For borrowers with very little credit history, you will need to spend several years making on-time payments and building up your credit before you’ll be eligible for competitive rates.
Where Should You Refinance?
According to Wall Street Journal, the five main refinancers had originated more than $4 billion in loans since 2012. And that sum has actually doubled since then. SoFi. Which was the first company in the industry, has to date refinanced more than $8 billion in student loans, and the newer Earnest announced recently that it had surpassed the $1 billion mark.
It is now easier for borrowers to refinance their loans through younger fintech startups, such as Earnest and SoFi; traditional banks, like CitizensBank; or even the 11 state loan authorities. (Which include: Connecticut, Alaska, Iowa, Louisiana, Kentucky, Massachusetts, New Hampshire, Minnesota, New Jersey, South Carolina and Rhode Island.)
Which type of lender will offer the best terms depends on a borrower’s priorities and finances.
At a bare minimum, all creditors will assess not only your credit history but also your income. Some also consider your type of degree, your savings behavior, and where you went to college. A significant number of lenders will need a minimum debt of $10,000, but CommonBond accepts debt loads of up to $500,000. Most lenders offer both variable rates that can change severally during the repayment term and rates that are fixed for the entire repayment term.
State loan authorities offer terms that are usually competitive with private companies, but they also have a mission to increase borrower knowledge.
Certain private refinancers are very choosy in who they offer the best rates, so if you’re not eligible for their programs or if you aren’t offered a good rate, you may do better with a state authority.
Ultimately, you’ll need to shop around to see which lender offers you the best terms.
What is Your Goal in Refinancing?
Lenders promote refinancing primarily as a way to save money. But there are other few reasons borrowers may choose to refinance.
Many borrowers are looking to reduce their monthly payment by extending their term and significantly lowering their interest rate. Note that there is a way to lower your payment by extending your term in the federal system, but not to lower your interest rate.)
Other people want to maintain their monthly payment amount but pay more toward their principal by reducing their interest rate considerably. Occasionally, borrowers want to combine multiple private and federal loans into one loan just to simplify their monthly bills. And often borrowers get offers that do all three: lower their interest rate, simplify their payments and lower their monthly.
What Kind of Term Should You Look For?
Being eligible for refinancing, of course, doesn’t tell you much. It is the terms you are offered and whether they are an improvement over what you currently have that matters.
Generally, borrowers with parent PLUS loans or graduates PLUS loans stand to save the most, since the interest rates on those loans have been close to 7% or higher in the past decade. On the other hand, undergraduate loans have carried interest rates that are below 5% in recent years, which means it will be nearly impossible for lenders to undercut your rate.
You’ll generally have the option of choosing a variable interest rate, which means your monthly payments will certainly change in the course of your repayment period depending on the market interest rate. Variable rates usually start from as low as 2%, but market rates remain near historic lows, so if you take a variable rate now, be prepared for it to increase in the coming years. In general, variable rates are highly recommended for borrowers who are able to pay off their debt quickly.
Don’t be easily swayed by a lower interest rate; just make sure you pay attention to how much that lower rate will save you over the life of the loan.
A borrower with $100,000 in Graduate PLUS loans from about five years ago when interest rates were 7.9%, for example, could save about $110 on her monthly payment by getting a two percentage point reduction whilst maintaining the length of her repayment term. Terms mostly range from five years to 20 years, and interest rates rise as the length of the term grows.
Finally, lenders may add additional individual features that could make them a better fit for you, and this is where you’ll see the most diversity in offerings.