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By Kaitlin Mulhere
November 14, 2016

Opportunities for student borrowers to get new terms on their debt have surged in the past few years. But there’s still plenty of confusion about who qualifies for refinancing and whether it’s a good idea.

There is no way to refinance your federal student loans within the federal system. So if you refinance, you forever give up access to certain benefits available only to federal loan borrowers—a warning you’ll hear stressed by just about every financial planner and student loan expert.

“My big fear is that people are attracted by a low interest rate and saving on their monthly payments and aren’t paying attention to those benefits they’re giving up on the back end,” says Debra Chromy, president of the Education Finance Council, an organization that represents state and nonprofit lenders.

For example, you’ll lose access to the federal government’s income-driven repayment plans. These plans, which are a protection in case of a pay cut or job loss, set your monthly bill according to your salary and offer loan forgiveness after at least 20 years. You also won’t be eligible for public service loan forgiveness, under which government and nonprofit workers can have their outstanding debt discharged after 10 years of payments. And you’ll likely be ineligible 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’s how to decide if refinancing makes sense for you.

Will You Even Qualify?

Refinancing so far has largely been available only for a tiny slice borrowers—those with super-prime credit, lucrative degrees, six-figure salaries, and large debt loads. In fact, one of the biggest critiques of well-known refinancing companies, including SoFi and CommonBond, is that they cherry pick the absolute safest borrowers.

The borrowers who could really benefit from refinancing, those who are solidly middle class, are still being denied even with co-signers, says Adam Minsky, a lawyer in Boston who specializes in student loans.

Yet as startup lenders have grown more comfortable with the level of risk they can take on, and more lenders enter the refinancing space, a wider population of borrowers is starting to be accepted for refinancing, says Stephen Dash, who founded Credible, an online student loan marketplace where users can compare offers from multiple refinancers.

“Refi is not just for people with monster debt and monster incomes,” he says. “We’re seeing people refinance student debt that’s around the same size as their salary.”

For borrowers without much credit history—essentially all 20-somethings who recently graduated—you’ll need to spend several years making on-time payments and building up your credit before you’ll be eligible for competitive rates, says Mark Kantrowitz, a financial aid and student loan expert.

Where Should You Refinance?

The Wall Street Journal reported last summer that the five major refinancers had originated more than $5 billion in loans since 2012. That sum has at least doubled since then. SoFi. the first company in the industry, has refinanced $8.35 billion in student loans, and the newer Earnest recently announced it had surpassed $1 billion. Plus, several state agencies have joined the refinancing market since last November.

Borrowers can now refinance their loans through traditional banks, such as CitizensBank; younger fintech startups, such as SoFi and Earnest; or 11 state loan authorities. (They are: Alaska, Connecticut, Iowa, Kentucky, Louisiana, Massachusetts, Minnesota, New Hampshire, New Jersey, Rhode Island, and South Carolina.)

Which type of lender will offer the best terms depends on a borrower’s priorities and finances.

 

At a bare minimum, all lenders will evaluate your income and credit history. Some also consider your type of degree and industry, your savings behavior, and where you went to college. Many lenders require a minimum debt of $10,000, but CommonBond, for example, accepts debt loads ranging from $3,500 to $500,000. Most lenders offer both fixed rates that are locked in for the entire repayment term and variable rates than can change multiple times during the repayment term.

State loan authorities offer terms that are usually competitive with private companies, but they also have a mission to increase borrower knowledge, Chromy says. Profits from refinancing go toward supporting local outreach activities to help state residents save and plan for college, and that can be a nice bonus for borrowers when deciding among companies, Chromy said.

Some of the private refinancers are very selective 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.

The Massachusetts Educational Finance Authority’s traditional lending programs—loans designed for families to fill the gap left by federal loans—serves clients with a range of credit scores, Thomas Graf, the authority’s executive director, says.

“That’s the goal of what we’re trying to do (with refinancing), too, ” he says. “Be available for everyone.” Of course, there are limitations to that, since the loans are based on credit quality, but generally a credit score of at least 670 (out of 850) is enough to qualify for MEFA’s loans.

Ultimately, you’ll need to shop around to see which lender offers you the best terms. Credible and Overture Marketplace both provide borrowers a platform to compare several individualized offers at once. It makes sense to start researching your options shopping with these sites, but neither includes every lender that offers refinancing, so there’s a chance you could get a better rate offer from a company outside those marketplaces.

What is Your Goal in Refinancing?

Lenders promote refinancing primarily as a way to save money, advertising lifetime savings of $14,000 or more. But there are few other reasons borrowers may decide to refinance.

Many borrowers are looking to reduce their monthly payment by lowering their interest rate and extending their term, says Noel Simpson, deputy director of the Rhode Island Student Loan Authority, or RISLA. (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.)

Others want to keep their monthly payment amount the same but pay more toward their principal—and thereby pay off their loan faster—by reducing their interest rate. Sometimes borrowers want to simplify their monthly bills by combining multiple federal and private loans into one loan. And often borrowers get offers that do all three: lower their monthly bill, lower their interest rate, and simplify their payments.

What Kind of Term Should You Look For?

Being eligible for refinancing, of course, doesn’t tell you much. It’s the terms you’re offered and whether they’re an improvement over what you have now that matters.

“Don’t get caught up in anything that says ‘rates as low as’ because you may not qualify for that,” Chromy cautions.

In general, borrowers with graduate PLUS loans or parent 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. Undergraduate loans, on the other hand, have carried interest rates lower than 5% in recent years, which means it will be nearly impossible for lenders to undercut your rate.

Read more: A look at the 5 biggest refinance companies and what they offer

You’ll generally have the option of choosing a variable interest rate, meaning your monthly payments will change during your repayment period based on the market interest rate. Variable rates start 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. Generally, variable rates are recommended for borrowers who can pay off their debt quickly—in a period of a few years or less.

Don’t automatically be swayed by a lower interest rate. Instead, 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 2 percentage point reduction while keeping the length of her repayment term the same. Terms mostly range from five years to 20 years, and interest rates rise as the length of the term grows. You can use online calculators, like this one from NerdWallet, to ballpark your own savings.

Finally, lenders may additional individual features that could make them a better fit for you, and this is where you’ll see the most diversity in offerings.

RISLA’s benefits, for example, are rare in that they include a income-driven plan similar to the ones offered by the federal government for borrowers who are struggling financially. Earnest boasts a mobile app, in-house loan servicing, and a unique pricing philosophy that can save you money on interest. You can choose your monthly bill and the corresponding repayment length and interest rate. So if your budget will accommodate spending $315 a month toward student loans, and that means you’ll pay off your debt in 11 years and 7 months, you can choose that as your term. SoFi, on the other hand, has a variety of small perks for its borrowers, which it calls “members,” including career support, job search help in the event of a job loss, and access to wealth advisers.

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