Living with credit

Student loan refis not for everyone

Kelly Dilworth

As 2014 winds down, the six-month grace period for student borrowers who graduated in May is fast approaching, causing many recent grads to panic over how they’re going to repay their student loans.

Some well-intentioned commentators are advising student borrowers to consider refinancing their loans with a private lender, which could potentially save them a bundle on interest. But as The Washington Post’s Danielle Paquette recently pointed out, the borrowers who are most in need of help are unlikely to qualify for the best deals.

A student loan refi isn't for everyone

“Refinancing, proponents say, is especially attractive as the nation’s total student loan debt burden hits $1.2 trillion,” writes Paquette. “The grim reality of refinancing, however, is that most borrowers — the average bachelor’s degree graduate with debt owes $29,000 — aren’t eligible for the deal. Education refinancing requires steady income and a high credit score.”

So unless you already have a good job and a solid credit history, or you have a well-off parent who can help you out, you’re stuck with the rate you’ve got — at least for now.

A growing market
The number of private lenders offering student loan refinancing is steadily increasing. Earlier this year, both Discover Financial and Citizens Bank began offering private student loan consolidation and refinancing.

Last month, Citizens Bank announced that it would allow student borrowers to refinance their federal loans as well (most private lenders will only refinance private student loans).

According to The Wall Street Journal’s AnnaMaria Androitis, private lenders are re-entering the student loan refinancing market in order to attract recent grads who may one day become lifelong customers.

“Refinancing dried up during the credit crisis, when demand for education loans packaged into securities largely disappeared and banks deemed the debt too risky to hold on their books,” wrote Androitis in a February 2014 Wall Street Journal article.

Now that the economy is picking up and consumers’ finances are improving, many banks are looking for opportunities to snag potential customers who will eventually need other types of loans, such as auto loans and mortgages.

By refinancing a private or federal student loan, recent grads can reduce their interest rates considerably. For example, Citizens Bank offers a variable interest rate starting at 2.30 percent and a fixed interest rate starting at 4.74 percent with no fees. The interest rate on a private student loan, by contrast, can run as high as 12 percent or more. Meanwhile, undergraduate students who apply for a direct federal loan are currently charged an interest rate of 4.66 percent, according to the U.S. Department of Education.

In order to qualify for a loan refinance, however, you need a dependable income and a fairly solid credit history. For example, according to The Washington Post, Citizens Bank won’t refinance your loan unless your FICO score is at least 660. The bank also requires a regular income of at least $24,000 per year, according to Citizen Bank’s website.

The San Francisco-based lender SoFi is even pickier. SoFi offers borrowers variable rates as low as 2.66 percent and fixed rates as low as 3.63 percent. But SoFi’s chief executive Mike Cagney told The Washington Post that the typical SoFi borrower pulls in $150,000 a year and has a 770 credit score.

Meanwhile, Common Bond, another lender that refinances student loans at extra low rates, will only work with borrowers who have a graduate degree, such as an MBA or a J.D.

Recent grads who don’t qualify for a low-rate refi on their own may be able to recruit their parents to help them out. But even then, their parents will also need to be in decent financial shape in order to qualify as a co-signer.

A risky bet for some
Consumer advocates also caution that student borrowers should think twice about refinancing their federal student loans, even if they do qualify for an extra low rate.

By refinancing your federal loans with a private bank, you could save a significant amount of interest in the short-term. But you’ll also be giving up a range of consumer protections that you may need down the road.

For example, you won’t be able to take advantage of income-based repayment or federal loan forgiveness programs. Nor will you qualify for federal programs that allow you to discharge your debt if you become disabled.

On Oct. 16, the Consumer Financial Protection Bureau (CFPB) chided private lenders for making it tough for struggling borrowers to avoid defaulting on their debt. “While federal student loans offer options to avoid default through several loan modification and alternative repayment programs, lenders and servicers of private student loans generally do not,” said the CFPB in an annual report on student borrowers’ complaints. If you opt for a private student loan, you could have trouble convincing your lender to adjust your monthly payment terms or give you a longer forbearance period if you run into financial trouble, according to the report.

You could also get hit with a much higher rate in the future if you trade in your fixed rate federal loan for a private lender’s ultra low variable rate. Interest rates are currently at historic lows thanks to a rock bottom federal funds rate. But when the Federal Reserve eventually raises rates — and it will — those extra low variable rates will also spike, making it harder to justify the switch.

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