Should you refinance your student loans?
Graduates strapped with student debt don't have many options when it comes to reducing the total amount they owe on their loans, but refinancing is one. While many lenders pulled out of the student loan refinancing market during the 2008 economic crash, a few are heading back into the fray, providing borrowers with hefty loans a viable way to lower their total debt. Refinancing isn't the best choice for all borrowers, but it is worth examining if you owe a significant amount. Here's what you need to know if you're considering refinancing your student loans.
The nuts and bolts
The mechanics of refinancing are simple: A new lender pays off a borrower's existing student debt and offers a new loan, ideally with a lower interest rate, in its place. Only available through a small handful of lending institutions, refinancing offers borrowers the opportunity to consolidate multiple loans into one and to save some dough in the process. Even tiny rate reductions go a long way. For example, a borrower who graduates with $30,000 in loans at an 8 percent interest rate will fork over $13,678.11 in interest alone over a standard 10-year repayment term. A borrower who scores even a 1 percent discount on interest will save nearly $2,000.
Refinancing also offers the chance to start over, says Brendan Coughlin, president of auto and education finance for RBS Citizens Financial Group, the umbrella group for Citizens Bank and Charter One, which began offering private student loan as of January. Because refinanced loans come with a brand-new set of terms and conditions, the move can offer borrowers the opportunity to change how and when they repay their debt.
"Some students decide they want to extend their payments, so instead of a 10-year loan, now they want a 15-year loan to reduce their payments and improve their cash flow," he says, adding that Citizens informs students that extending their loan term means paying extra interest in the long run. "Other students have decided that they had a 10-year loan and now they want a five-year loan, and they really want to be debt-free much faster than they originally anticipated when they were in school."
Coughlin says that one of the biggest reasons borrowers seek refinance is to get out of variable rate loans now that interest rates are rising.
"If you're a customer that has a variable rate loan and you're trying to lock in a fixed rate, it very well may be that the fixed rate is slightly higher than the variable rate," he says. "But you're getting the peace of mind that it's fixed and it's never going to change."
Is refinancing right for you?
Refinancing isn't a smart move for everyone, especially those who have federal student loans that come with protections like income-based repayment options and early loan forgiveness for borrowers working in public service professions. The federal government does offer a consolidation option for those with multiple federal loans, but Uncle Sam won't let you throw private loans in the mix. Thus, borrowers seeking refinance generally have to turn to a private lending organization, many of which exclude federal loans entirely and none of which offer loan forgiveness as a protection.
Mike Cagney, co-founder of SoFi, a company that offers refinancing on both federal and private loans, warns anyone thinking about refinancing to carefully evaluate the benefits they'll be giving up on their old loans and the protections that come with the new loan. SoFi currently offers income-based repayment options to a select few borrowers with high debt and low incomes, as well as payment postponement options for borrowers facing unemployment or financial hardships, and to those starting a new business.
"You could have a great job, a great career, but life events come up and you want to make sure that when they come up, that you've got a lender who's going to be flexible, who understands the long-term benefits of you being in the community and who's going to work with you to make sure you're OK," he says.
In addition to analyzing how much they'll save over the life of their loans, borrowers should also ask whether they'll need a co-signer for the refinanced loan, if the lender offers payment postponement programs in times of financial hardship and if they'll need to pay any origination or processing fees. Borrowers should also keep in mind that they don't have to refinance all of their loans together. If you have a low-interest federal loan and want to keep it separate from any private loans you've taken out, it's perfectly fine to refinance just the private loans.
Cagney also recommends that borrowers research the financial stability of the lending institution before they start the refinancing process.
"You want to ensure that the organization is sufficiently capitalized, [that] it's going to be there for the life of your loan," he says. "... Nobody wants to take a loan out from a lender, then have them sell the loan to somebody else and then you have to deal with a whole new user experience."
Loan Calculator, FinAid.org,
Frequently Asked Questions, SoFi.com,
SoFi Refinancing vs Federal Loans, SoFi.com,
Federal Student Aid: Income-Based Repayment Plan, U.S. Department of Education, StudentAid.gov,
Federal Student Aid: Loan Consolidation, U.S. Department of Education, StudentAid.gov,
Federal Student Aid: Public Service Loan Forgiveness, U.S. Department of Education, StudentAid.gov,