Borrowers with mortgages often consider refinancing their debt, allowing them to take advantage of lower interest rates and securing repayment options that are more convenient. Yet, when it comes to student loans, the options are often limited.
Repaying federal student loans is getting less painful however. Private lenders are stepping in with offers to make it easier, and cheaper, for borrowers to repay their high-interest private educational loans.
Refinancing Student Loans Could be Beneficial
Susannah Snider cites the situation faced by one student loan borrower: a former student was tackling the repayment of a $40,000 high-interest, federal loan. After getting some advice, this borrower did an online search for lower interest rates. After stumbling across a company called SoFi, they decided to sign up.
Still in the process of repaying the remaining $31,000 of the student loan, the loanee is saving 2% points on what they were previously paying, managing to save thousands in the long run.
Private Student Loan Refinancers – A Trend on the Rise
SoFi, based in San Francisco, offers loans to highly qualified graduates. It is currently the largest provider of student loan refinancing. SoFi has refinanced over $1 billion to date.
According to reports from SoFi, prior to refinancing, borrowers had an average loan balance of $71,000, an interest rate of 7.07 percent, and a lifetime payment that amounted to $99,239 (based on the standard Direct Loan term). After refinancing, these borrowers had an average lifetime payment of $87,456 based on a weighted average of new rates across fixed and variable interest rates: that means they saved $11,783 over the life of the loan.
Another company based in New York, Pave, relies on crowdfunding to buy out existing loans. The borrower repays the loan based on his/her income level. At first it might appear that Pave loans cost borrowers the same as other loans, due to the fees they charge but Pave offers greater flexibility and more forgiveness than most banks do, which is highly beneficial for new graduates.
Student loan borrowers must note the difference between private loan refinancing (consolidating various loans) and federal loan consolidation (converting interest rates into a weighted average). Private loan refinancers often take into account various financial factors before determining the refinanced interest rate. These factors could include aspects like the borrower’s credit score, etc.
The Benefits of Refinancing Your Student Loan
Refinancing student loans can be beneficial for borrowers with high interest federal loans. Private loan refinancers can provide competitive refinancing rates, which can save thousands long term.
Many student loan refinancers also provide options like modifying the repayment term. Borrowers could opt for shrinking their repayment term to five years or extending it to 15 years. Doing this often lowers the monthly payments, while maintaining or reducing the total repayment amount. However, refinancing federal loans involves certain risks too.
The Potential Risks of Refinancing Federal Student Loans
Federal student loans usually offer a range of borrower protections. For example, debt forgiveness for eligible borrowers, deferment and forbearance. These give the borrowers a temporary reprieve from making repayments, if they are struggling.
Borrowers could lose these benefits when they refinance their federal loans with a private lender. If they were to lose their jobs for instance, they might not be able to pause or lower their monthly payments. Some private loan refinancers, like SoFi, do offer unemployment protection. You should confirm this with their private lenders before signing up.
Snider concludes that this particular borrower, who signed up with SoFi, had a positive refinancing experience. It is always important to review the agreement terms very carefully before getting a private lender to refinance student loans.