Student loan debt has reached a staggering $1.2 trillion. When student loans are issued, very few questions are asked. College students have not started their career, and they do not have a credit history. Federal and private lenders cannot look at income, employment or FICO scores because they don’t yet exist. So lenders issue big loans and hope that once you graduate, you will be able to pay back the loan. And to make sure you pay back, the government passed a law making it almost impossible to eliminate both federal and private student loan debt in bankruptcy.
When college students graduate, they begin to demonstrate their earning potential and build their credit scores. Although all students are treated the same by lenders when they are borrowing, they start to look very different once they enter the real world and get jobs. Some people start to realize that they can’t afford their student loan payments and panic. Other people, with big starting salaries, become increasingly annoyed by the high interest rate they are paying. In the last few years, good options have emerged for both groups to save a lot of money.
I Have A Good Job, And Want A Lower Interest Rate
Interest rates on student loan debt can be high. To solve this problem, a number of lenders have started offering opportunities for borrowers to refinance their student loan debt at much lower interest rates. In order to qualify for a refinance, most lenders have strict underwriting requirements. You need to have a job with a good salary and a good credit history. Many new lenders understand that recent college graduates are likely to have a thin file or no credit score, so they are willing to consider other indicators of your credit risk. For example, some lenders will look at your bank account to see the pattern of your cash flows and level of savings. Other lenders will consider where you studied and what degree you received. A computer science degree would be considered lower risk than an art history degree. All of these lenders are trying to find ways, beyond the traditional FICO score, of determining your credit risk.
The number of lenders offering student loan refinancing has expanded in recent years. A number of start-ups have been growing exponentially. SoFi is the leader in this space, having originated over $2 billion since launch. Credit unions have started expanding their student loan portfolios rapidly. Even large commercial banks are attracted to this space, with Citizens Bank leading the charge.
As you might imagine, the Silicon Valley start-ups tend to have the lowest interest rates. You can now find variable interest rates as low as 1.90%, and fixed rates as low as 3.50%. If you want to find a good rate, you should feel safe shopping around. According to FICO, you can apply for as many student loans as you want in a 30-day period, and it will only count as one inquiry. You can find a good list of student loan providers, ranked by interest rate, at MagnifyMoney.
If you want to refinance your student loan debt, remember to consider the following:
- Is there an up-front origination fee? If you plan on repaying your student loan debt early, a fee can become meaningful.
- Be careful before signing up for a variable rate. If you are going to pay off your student loan debt in the next few years, you may want to save the money and take the interest rate risk. But 25 years is a long time, and we are at all-time low interest rates. If rates increase, you could end up in a very difficult situation later during the term.
- Be extremely cautious before refinancing a federal student loan. Federal loans offer a lot of protections that private student loans do not, including income-based repayment. If you refinance a federal student loan to a private loan, you will be giving up all of those protections.
Given how low interest rates are right now, borrowers with strong credit profiles should seriously consider locking in lower rates. The savings can be significant.
I Have A Low Income And Cannot Afford My Loan Payments
Many professions pay low salaries, especially for entry-level positions. If you find that your federal student loan payments are more than 10-15% of your monthly discretionary income, you may be able to qualify for a program that would cap your monthly payment. Even better, the federal programs offer principal forgiveness. For example, if you want to commit yourself to working for a non-profit and expect a low salary throughout your career, your payment could be capped at 10% of your discretionary income and the remaining principal balance would be forgiven after 25 years. You can learn about the various program on the Federal Student Aid website. The website also offers a repayment calculator, where you can estimate your payment and your savings.
MagnifyMoney (my website) recently conducted a national poll. Only 40% of college graduates are aware of these income-based repayment options. If you want to take advantage of the savings, you have to be proactive.
Just remember the following:
- These options are only available for federal loans. And the level of potential forgiveness varies by program.
- Your payments are generally based upon income from your tax return. If you are married and file jointly, both incomes will be considered in the calculation.
- If you have federal student loan debt and refinance to a private lender, you will forfeit your ability to use these programs in the future.
These programs have the potential to be incredibly generous. If you have federal student loan debt and need help, you should start doing your homework and consider taking advantage of these programs.
None Of The Above
If you have a private student loan and do not qualify for a refinance, you should continue to work on improving your credit risk profile. That means making your student loan payments on time, sticking to a budget and avoiding building up credit card balances. Over time, your risk profile should improve and you may be able to qualify. The student loan refinance companies continue to expand their credit criteria as they grow, so you may find that you qualify at the same lender in a year from now.
But if you are in financial difficulty right now, you should just call your servicer and explain your situation. The programs offered vary by private student loan company. It never hurts to call and ask. One thing is certain: if you don’t ask for help with your payment, your servicer will not give it to you.
Unfortunately there are no perfect solutions to the growing student loan problem. If you can qualify, refinancing or taking advantage of income-based repayment could be a big help.