In general, I am skeptical of “refinancing” because it’s a term (and proposed solution) that gets thrown around too loosely. In my opinion, it’s not a cure-all for our financial illnesses. But, regardless of my opinion, refinancing is used for a variety of purposes. In some cases, it leads to a lower monthly payment. In others, it brings about a lower interest rate (this is the best use). And, sometimes it facilitates the consolidation of multiple accounts into one convenient monthly payment.
While I think refinancing is overused, in the case of student loans it is becoming more of a need for consumers, particularly those with private student loans. We’ve said this countless times, but we’ll say it again: federal loans are great for the consumer. They offer flexibility and safety nets that are unmatched by private loans. And while that’s great, the opposite is true for private loans. Based on feedback we have received on our post about repaying private loans, it’s clear that the big lenders like Sallie Mae are not offering anywhere near the same level of flexibility and accommodations. And in reality, many consumers will be doing themselves a favor by refinancing their loans elsewhere, if that is an option for them.
So with that said, let’s lay out the steps you will need to take in order to refinance your student loans. We will still cover the federal loans, but our focus will be on your private education loans. And don’t worry, we have a few tips in store specifically for those who attended graduate or professional schools. Not only will we cover the ins and outs of how to refinance student loans, but we will also be sure to discuss the best banks and companies to refinance your student loans with. Keep in mind that your mileage may vary based on a variety of factors, including your credit history.
Step 1: Determine if you are a good fit
Before you commit to this plan you will need to crunch some numbers and see whether refinancing is a good option for you. You will want to compare your current interest rates to the estimated rates offered through the refinance. You will also need to account for any benefits you may be giving up, such as flexibility, forbearance options, and so forth.
If you are less interested in a lower interest rate and are more concerned with a lower monthly payment, you should carefully consider the consequences of refinancing. Have you exhausted other options first, such as altering your budget and communicating your difficulties to your lender? Be sure to do both of those first. A lower monthly payment now might mean you pay significantly more later.
After thinking over these questions, you will be much better prepared to determine if refinancing is the right choice for you and understand how much it will cost you in the short- and long-term.
Here is an example of when refinancing makes a lot of sense. Let’s assume you have a $15,000 private loan with a 10 percent interest rate. Here are some facts about the repayment, if you keep it going for the full 10 years.
But what if you refinanced after two years, to a much better interest rate? Here, we assumed that you paid the minimum payment on the original loan for two years, and then refinanced to a six percent rate, which also brought down the monthly payment.
After the full 10 years, you will have only paid $6,237.81 in interest, which represents a savings of $2,549 as a result of the refinance.
*Pro tip: If you were able to maintain the original monthly payment after your refinance, you can save even more. Your total interest paid will be reduced to $5,645 which represents a savings of about $3,143 from the original loan and an additional $594 in savings from when you refinance and adopt the lower monthly payment.
Step 2: Prepare your credit
Like with any refinance plan, you need to prepare in advance. The terms of your refinance will be dependent upon how your lender views you, in terms of risk. In other words, it’s going to come down to your credit score. This means that months before you plan to pursue the refinance, you need to do a few important things. They might be boring, or even tedious, but they will help you qualify for the best possible deal.
To start, get copies of your credit report for free at www.annualcreditreport.com. Then, do the following:
- Ensure your identifying information is accurate.
- Dispute errors in the report immediately.
- Evaluate any credit blemishes.
If you have past due accounts or any recent blemishes, you will want to address those immediately. Get your accounts in good standing and take positive steps forward as soon as possible. Doing so will help improve the rate of your refinance. Keep in mind too that it might be better to wait and postpone the refinance longer if doing so means that you can get a better interest rate and save significant money.
Step 3: Choose a Lender
If you’re going to do this, you’re going to need to find a financial institution that is willing to help you. We are going to cover some of the best resources out there, and we expect that you haven’t heard of all of them before.
For Federal Loans
We would never recommend consolidating federal loans into private loans for one very simple reason: you would be sacrificing your safety nets. You see, student loans have become a crisis, but the one silver lining in it all is the benefits and flexibility of federal loans. While you still have to meet your obligations and pay on time, etc. there are much more forgiving policies and place and many reasonable options for borrowers and both ends of the income spectrum.
While you don’t want to consolidate outside of federal lenders, there is still a refinancing option sponsored by the government. This loan is called the Direct Consolidation Loan. It allows you to bundle multiple federal loans into one account with one monthly payment and one fixed interest rate. Obviously, one monthly payment will be convenient, but that shouldn’t be your main reason for refinancing. Consider this to be a smart option for you if you have some variable interest accounts that you need to bring down or if you are looking to bring down a monthly payment and other options have not been successful.
The video section below provides some insight into federal loan refinancing via the Direct Consolidation Loan.
This option is even available to consumers with a defaulted loan. Consumers can agree to repay the new loan under the Income-Based Repayment Plan, the Pay As You Earn Repayment Plan, or the Income-Contingent Repayment Plan, all of which have favorable terms. Having this type of flexibility and “options” even when you are in default is an incredible perk and one that virtually no private loan borrower would be able to find.
There is one last perk of this option. The repayment terms are tiered based on how much you owe. Again, this is incredibly reasonable and fair. The more you owe, the more time you have to repay it. Of course, delaying repayment can cost more on interest, but this flexibility is great for those who are struggling. Here is a table from the federal loans website that shows how your obligations change based on how much you owe. Note: this image is from the old consolidation loan website. Borrowers are now encouraged to call 1-800-557-7392 instead of relying on the old website, although we assume this chart is still applicable:
Lenders that Refinance Private Loans
Many of these are relatively new companies who have come into existence simply because there is a market for this type of service in today’s economic climate, as student debt continues to spiral out of control. Please note that we aren’t advocating for one service over any of the others. We are simply trying to lay out the facts so that you will be more prepared when you begin your own research and try to decide what’s best for you.
We’ll start with a name you probably recognize. Wells Fargo is a national bank who offers refinancing options. It’s certainly not the only large financial institution with this type of program (at least SunTrust and RBS Citizens have similar programs). However, refinancing through any bank will be somewhat similar, so keep these points in mind if you use a big bank.
Here is an overview of what Wells Fargo offers, along with some finer points to keep in mind:
- Variable and fixed interest rates are available.
- You may need to be assertive about obtaining a fixed rate, as the lender may try to suggest the variable rate.
- Interest rates are higher than the lowest rates offered by alternative lenders.
- There is a customer discount for qualifying Wells Fargo account holders.
- A credit score of around 650 is likely needed to be approved.
We are now moving into a discussion of some lesser known companies who have positioned themselves to help address the student loan crisis through a variety of refinancing services. We’ll start with SoFi, who is arguably the most recognizable name from the group.
SoFi has become a recognizable name in the student loan industry and in the realm of peer lending. The site is a hip San Francisco-based company with a young vibe and crowdfunding feel. It got it’s start as a company that matched indebted Stanford graduates with alumni who could help them better manage their debt by investing in it and then establishing better repayment terms.
The same concept guides SoFi today, although it has expanded to include “institutional investors” as well. Still, only certain colleges and universities are eligible, and a few states are excluded from the list entirely. If you live in these states, you aren’t currently eligible for the program:
- North Dakota
- Rhode Island
- South Dakota
Some basic stipulations about qualifying, according to the SoFi website, include being 18 or older, employed or having an offer of employment, having not declared bankruptcy within the last three years and having not been convicted of a felony.
Of course, it takes more than that to qualify. You need to have attended one of the eligible schools, and you need to undergo a review of your overall financial picture. SoFi will evaluate your credit score, income and debt load before extending a refinance opportunity to you.
If you do get in, the savings can be significant. SoFi claims to save its members an average of $9,400 and offers rates as low as 2.66%.
Pave thinks of college graduates as “talent” – people with the potential to go on to do incredible things that will have a positive impact on the world. Perhaps one of the biggest obstacles to implementing this type of change is the student loan debt holding young consumers back.
That’s where “backers” can come in and help. Backers are those who have gone on to become successful and have additional resources to spare. Backers fund talent in a variety of ways, one of which is student loan refinancing.
Student loan debt can keep young talent from doing more important things, like starting a business or working toward a goal that can bring about positive social change. Rather than pursuing these noble causes, many young graduates might take jobs that aren’t fulfilling and their creativity and potential to try new things might be limited.
Backers alleviate the stress of student loans and free talent from the burdensome aspects of repayment, such as lenders asking for unreasonable percentages of income, and the general cutthroat nature of private student loan lending, where the lenders make more money when they charge higher interest. Because Pave pairs talent with like-minded Backers and backers receive “interest” on the loans they give, Pave has leveled the playing field significantly and created an arrangement of “aligned interests.” In other words, all parties are working toward the same goal.
The payments through Pave are capped at set percentage of a borrower’s income, which is unheard of for private student loans. By taking out a loan with a Backer, a Talent could potentially pay down the high-interest private student loan debt and then repay the backer at only a small percent of income. It’s an incredible opportunity.
The payments last for five or ten years, and after this time the slate is wiped clean. Even if you haven’t repaid the full amount borrowed, you won’t owe any more. Thus, there is risk involved for the Backers, but when it goes according to plan they do receive interest.
Darien Rowayton Bank
DR Bank (Darien Rowayton Bank) is far from a household name, but the service they offer to graduates of professional schools is noteworthy. This is a group of students that is often overlooked in debates and conversations about student loans, but in reality they take on significant debt. We often hear about the salaries earned by doctors and lawyers, but it’s easy to forget how much of an investment they have made into their education. DR Bank has a consolidation program geared specifically toward this group and the terms are impressive.
Here’s the explanation of who is eligible: “DRB Refinance/Consolidation Loan offers alumni of MBA, Law, Medical/Dental (post-residency), Physician Assistant, Advanced Degree Nursing, Pharmacist, and Engineering graduate programs the opportunity to refinance and/or consolidate student loan debt at low rates.”
According to its website, DR Bank charges fixed interest rates between 3.5 and 6.5 percent. The variable rates are capped at 9 percent for loans with five, ten, or fifteen year terms but the 20-year loan can reach an interest rate of up to 18%.
This can be a good option for those whose loan totals are higher than other refinancing programs allow. DR Bank will refinance up to 100 percent of the balance. Consumers may find that DR Bank’s rates are lower than some other alternatives, too.
I have to give DRB some “props” as well for its transparency. By reading the FAQ section of their site, you quickly become aware of their commitment to responsible repayment. They are honest about the benefits of federal loans (and why you should think twice before refinancing them) and warn against the potential pitfalls of variable interest rates.
Common bond is another refinancing option for graduate students and can serve two primary purposes—either a lower total repayment or a lower monthly payment (at a longer term). This sort of flexibility is great because it covers a variety of financial situations.
Like with most of the options mentioned here, you need to have attended a network school and have a satisfactory credit history. You also must fit one of these categories:
- an MBA
- a JD who passed the bar exam in at least one state or district
- a board-certified MD
- or a degree holder from a graduate-level engineering program
The company offers forbearance options and a community of support for those with short-term repayment difficulties. It also has a strong mission focus as it supports students in need abroad. CommonBond also makes this promise: “For every degree fully funded on the CommonBond platform, we fund the education of a student in need abroad for a full year.”
CUStudentLoans is another potentially helpful resource for those with private student loans. The company has formed a network of credit unions that offer refinancing opportunities to those who graduated with debt. There are a few eligibility requirements to consider. First, you must have attended an eligible school (although the list on their website looks robust and this won’t pose a problem for most people).
Secondly the applicant(s), including any cosigner, must have a monthly income of $2,000 or greater. While you can get the loan without a cosigner, it may be reserved for only those with excellent credit. Due to the amount of information about cosigners in the eligibility portion of the FAQ, it seems as though this might be a common route. We have to remind you about the dangers of cosigning, so tread carefully here. One silver lining is that you can release the cosigner after one year of successful repayment.
The consolidation loan offered by CUstudentloans is a variable rate loan. So again, you will need to exercise caution here, as the rate can change and drastically affect your ability to repay.
Explore your Refinancing Options Carefully
We’ve covered a lot of information here. What you do with it is entirely up to you. Just be sure to fully evaluate your financial situation. Start by making sure that refinancing is a wise course of action, and then look at these potential lenders with a critical eye. Choose the option that gives you the most benefit while also minimizing additional risk. If you need help with student loans, or credit health in general, contact us today. We would be happy to help you make sense of it all.