Student loan interest rates are outrageous. At a time when the government can borrow for 10 years at 2.25 percent, it is forcing many students to repay their loans at interest rates as high as 7.9 percent, or higher, depending on when the loans were taken out.
Now some creative members of the banking and investment community have stepped in to offer refinancing of both federal and private student loans at much more favorable rates. These financial intermediaries can afford to offer lower rates and still make a profit on the loans; plus they give personal attention and assistance to borrowers.
The largest of this group is SoFi, a company started a couple of years ago by four Stanford Business school graduates that has now refinanced more than $2.5 billion in student loans. They’ve been named one of CNBC’s “Top 50 Disruptors,” and venture capitalists have valued the company at more than $1.3 billion.
Another company in this space is DRB Bank, which offers a similar product. DRB expects to reach $1 billion in loans this summer.
Each company offers similar terms and requirements for refinancing both private and federal student loans. Here’s what you need to know.
1. You need to meet some basic qualifying criteria. These include already having a job and income, having a reasonable credit score (likely at least 680, though both companies say they are flexible), and having a reasonable debt to income ratio (likely at least 40 percent).
2. You can refinance both federal and private loans, as well as parental PLUS loans, into a new loan. That results in one new loan, with a new rate and one payment. You don’t have to refinance all your loans (for example, those with a lower rate). And there is no fee for the loan or prepayment penalty.
3. Rates vary depending on the terms of the loan. If you are a professional with loans for a graduate degree, and are already employed, you may get a rate as low as 1.9 percent. But the average rate is around 3.5 percent — a huge savings if you have older student loans that still carry much higher rates. You can get a fixed rate or a variable rate on your refinanced loan, and then get a quarter-point discount for automatic payments.
4. You can refinance your parents’ loans into your own loan (if you qualify), getting their names off the loan — or get a lower rate on your newly refinanced loan by having a parent co-sign for the new package.
5. Beware of giving up federal student loan protections by refinancing. There are still some benefits to having federal student loans, despite their high rates. Federal loans offer opportunities such as deferment of payments in case of job loss and income-based repayment plans. And those entering public service may qualify for loan forgiveness after 10 years of on-time payments.
For Dan Macklin, co-founder of SoFi, this is more than a business; it is a way to help graduates improve their lives. He says young people can afford to buy a home or start a family with the savings, noting that the average refinancing results in the customer saving $12,000 over the life of the loan, while professionals may save that much every year! And SoFi provides personalized career counseling in resume writing and job search to borrowers if they lose their jobs.
It’s about time that someone cares this much about student loan debt. And that’s The Savage Truth.