In the Press – Wall Street Journal – Should You Refinance Your Student Loans?

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More student-loan borrowers can now refinance their loans.

A growing number of lenders are offering to convert borrowers’ existing federal or private student loans into a new loan with a potentially lower interest rate. Marketplace lender Social Finance, better known as SoFi, leads this space with refinances that top $3 billion since 2012. More recent entrants include CommonBond, another marketplace lender, Darien Rowayton Bank and Citizens Financial Group. Personal loan lender Earnest Operations and Navy Federal Credit Union began refinancing student loans this year.

Refinances are slowly rising as a share of new private student loan originations. They accounted for up to 4.4% of private student loan dollars given out during the first three quarters of the 2014-15 academic year, vs. up to 4.1% during the same period in 2013-14 and up to 2.9% a year prior, according to the latest data from MeasureOne, which tracks the student loan industry. Its figures include refinances from Citizens, CommonBond and Darien Rowayton Bank but exclude SoFi and other refinancers.

Borrowers stand to save tens of thousands of dollars. Refinancing makes most sense for borrowers with high credit scores and good jobs. The lenders are seeking creditworthy borrowers—with FICO credit scores generally not lower than around 660, on a scale ranging from 300 to 850—and often times borrowers with high incomes. They shouldn’t have blemishes on their credit reports, like missed loan payments, which would likely disqualify them for a refi.

Borrowers who don’t meet this criteria are generally better off sticking with their existing loans, especially if they are federal loans since they provide more repayment plans for those experiencing financial difficulties. Here’s more on what to consider before refinancing.

1. Your new interest rate. Private student lenders generally offer a range of interest rates for refinances. The interest rate a borrower ends up with typically depends on his or her credit score, income, overall debt and other factors.

Most lenders are currently offering similar rate ranges. SoFi, for example, is charging between 1.90% to 5.19% for variable-rate loans or 3.50% to 7.24% for fixed-rate loans. Darien Rowayton Bank’s range runs from 1.9% to 4.5% for variable-rate loans and 3.5% to 6.25% for fixed-rate loans. Borrowers with the highest credit scores and incomes stand to get the lowest interest rates in this range.

In contrast, interest rates on many federal student loans are higher. Unsubsidized Stafford loans—often used by undergraduate and graduate students—given out for the 2006-07 through the 2012-13 academic years had a fixed interest rate of 6.8%. The federal Plus loan—used by many graduate students—charges 7.9% or 8.5% for loans given out during that period. Loan rates have come down since 2013 when Congress changed how they are calculated.

Refinancing can also help borrowers lower interest rates they have on their existing private student loans, if their credit scores have improved since they originally signed up for those loans.

Another perk: Many lenders that refinance don’t charge origination fees, so borrowers don’t incur fees for the transaction.

Applicants are likely to be offered lower interest rates with variable-rate loans rather than with fixed. Most variable-rate loans are pegged to  the one-month or three-month London interbank offered rate and can reset monthly or quarterly. Borrowers should consider the risks of a variable-rate loan in a rising rate environment, where their monthly payment payments will likely increase.

2. Refinancing from federal to private. Proceed cautiously before refinancing a federal student loan into a private one.

Switching from a federal loan to a private loan makes most sense for borrowers who have high credit scores and are in occupations with low unemployment and high incomes. That’s because everyone who is approved for a federal loan gets the same interest rate—regardless of their credit standing or income. The federal lending program doesn’t reward better-quality borrowers with lower interest rates—in contrast to private student lenders.

High-income borrowers could be less at risk when refinancing from federal to private. They will likely be less in need of the flexible repayment programs that accompany federal loans—but rarely show up with private loans. Federal loans have many repayment options for borrowers who lose their jobs or run into other financial trouble.

Federal borrowers can qualify to have their monthly loan payments lowered to 10% to 15% of their discretionary income—an advantage for borrowers who graduate with a lot of debt and a low salary. Federal loans also allow for balance forgiveness for borrowers working in public-service jobs. Borrowers with such jobs or those in low-paying positions, high debt levels, or who are worried they might encounter financial difficulties at some point should stick with federal loans.

3. Where to find looser standards. Borrowers with lower incomes and lower credit scores could have an easier time qualifying with credit unions.

Roughly 150 to 160 credit unions and community banks are refinancing through the platform LendKey Technologies, which launched in 2011, according to Vince Passione, its chief executive. The average income for borrowers refinancing is around $70,000, and some lenders in its network are approving borrowers with FICO scores as low as 620, he says. Interest rates range from 1.9% to 10.7%.

Prospective borrowers who want to shop around for a refi can check out comparison shopping site Credible.com, which allows borrowers to find out which lenders will approve them for a refinance and at what interest rate. Borrowers submit information they’d generally have to give to lenders at the point of application, such as their Social Security number and employment information. Beware, though, that the site currently doesn’t work with all of the biggest lenders that are refinancing.

By Annamria Andriotis

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