Sara Hamilton, a law school graduate repaying more than six figures in federal student debt, was ready to ditch her hodgepodge of high rates and frustrating loan servicing.
The Emory University alumna decided to renegotiate the terms of her debt by refinancing through a private lender, aiming for the lowest possible rate.
“I was focused on the cold, hard numbers,” Hamilton says.
After applying, and sorting through rejections and offers, Hamilton went with Darien Rowayton Bank. She currently repays her loans at 5.5 percent over 15 years.
[Discover the risks and rewards of private student loan refinancing.]
Refinancing involves repaying an older debt by taking on a new loan, with fresh terms. Private loan refinancing may involve consolidating various loans but differs from federal loan consolidation, which converts the interest rates to a weighted average.
Students eager to refinance their loans through a private lender may run into a challenge – but it’s a good kind of challenge. They’ll have to select a student loan servicer through which to refinance. That’s especially daunting as an increasing number of institutions, from traditional banks to investor-funded startups, enter the student loan refinancing market.
Here are three questions to ask yourself before selecting one.
• Why am I refinancing? Borrowers may choose to refinance for any number of reasons, say experts.
Some may be hunting for lower interest rates. Others may want to simplify the repayment process, melding a mix of loans into a single debt, instead of repaying several lenders.
Borrowers looking for a change may head over to an online startup for a different customer experience. Others may be looking to remove a cosigner from a private loan in the process.
[Learn how to earn a private student loan cosigner release.]
Federal borrowers angling for a better interest rate through a private group should keep in mind that refinancing federal loans into private debt carries risk, including giving up federal loan protections, such as deferment and certain federal loan forgiveness programs.
“A government loan is an easy loan you can work with,” says Leslie Tayne, director and managing partner of Tayne Law Group, a New York-based firm, and author of “Life & Debt: A Fresh Approach to Achieving Financial Wellness.” “Take a little bit of time to make a good, informed decision about whether refinancing makes sense for you today – and tomorrow.”
• What are the strengths of each lender? Each lender has its sales pitch, and it’s smart to shop around, say experts.
Some, such as Wells Fargo, are familiar companies. “We’ve been helping our customers refinance and consolidate for over 10 years,” says John Rasmussen, head of education financial services at Wells Fargo.
Since the bank issues new student loans, current Wells Fargo borrowers can refinance for better terms but stay with the bank. Some borrowers may do the rest of their banking at Wells Fargo, and moving loans over to the bank will allow them to manage their finances in one place, says Rasmussen.
Others, such as SoFi, are relatively new, investor-backed startups, with a focus on customer service and community. The company offers a temporary repayment reprieve and job search assistance for eligible borrowers who lose their jobs, and a chance at loan deferment and mentorship for aspiring entrepreneur. Unlike a traditional bank, borrowers through SoFi draw from a pool funded by alumni and other accredited investors, who are, in turn, hoping for a return on that investment.
“Our costs to the company are lower than the traditional bank,” says Dan Macklin, co-founder and vice president of business development at SoFi. “We don’t have a big infrastructure and applications are fully online.”
• What rate can I get? In the end, no matter the funding model, employment assistance perks or history, lenders offer a similar service. “Everybody’s money is green and they’ll pay off your loan,” says Tayne, the lawyer.
But comparing the interest rates between lenders can be tough. Rates vary depending on the length of repayment – typically a shorter term yields a lower rate – and the borrower’s credit. Variable-rate loans tend to have a lower rate but run the risk of that rate rising over time.
[Read about how to start student loan payment off right from the first payment.]
And ultimately, the rate is tied to borrowers’ financial health and credit. “You can put out whatever rates you want, but until folks get approved, it doesn’t really matter,” says Macklin, of SoFi.
So it’s up to the borrowers to do their research. “Really make a list of the important details of your loan: the lender – government or private ; your interest rates and what the other company’s interest rates are; repayment or deferment options,” says Tayne. “It’s a business decision.”
Written by Susannah Snider
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