Paying off student loans has become more of a hardship for recent graduates than ever before. With the annual rise in tuition costs, college students are finding it more difficult to pay for school out of pocket. As a result, the average graduate is saddled with just over $35,000 in student loan debt. Additionally, 7 out of 10 college graduates have some kind of student debt by the time their education is complete, so the question isn’t whether students are going to get loans to finance their higher education, but a question of how much student loan debt is required to graduate.
Now, the majority of student loans are originated by the federal government. The United States government allows any student to take out a loan in order to finance his or her college education. As more students are attending college than ever before, the job competition has greatly increased and many graduates find themselves unemployed and moving back home with mom and dad instead of working in a well-paying job. This makes the challenge of paying off student loans even more burdensome.
Student Loan Refinancing Is An Option
If you find yourself saddled with student loan debt, whether it is from federal or private loans, you should consider refinancing them. When people refinance their student loans, just like with a car or mortgage, they receive a new loan with different terms. The new private lender pays off all of the old loans, consolidates them into a single loan, and, ideally, provides a lower interest rate or monthly payment with more favorable terms and conditions.
The application process for refinancing is not very different than any other private loan that you would apply for. It requires filling out a loan application and a credit check. Similar to a car loan or home loan, not every applicant will qualify to refinance his or her student loans. The applicants with high credit scores and strong credit histories stand the best chance for obtaining the best interests rates and loan terms. However, many other potential borrowers can still qualify if they have cosigners on their applications.
Can I Refinance My Student Loans?
Generally speaking, private lenders will look at a couple different types of loan eligibility requirements when determining if a student can refinance his loans. Each potential borrower needs to pass some threshold requirements, such as a minimum loan amount, proof of graduation, and a minimum credit score, to determine initial eligibility. Next, the lender will look at the potential borrower’s credit history to determine the interest rate and loan terms.
In addition to the threshold requirements mentioned above, lenders want to see that borrowers have already made a certain amount of payments on their existing loans. The borrowers will also need to provide proof of current income, which needs to be at least $25,000 per year in most cases. Each lender has different threshold guidelines, so you need to check with each refinance company before you decide to move forward.
The “credit-worthiness” requirements are a little bit different. The lenders will look at your income level, your credit score, and your debt-to-income ratio. In order to get the best and lowest student loan interest rates, you will need to have at least a 720 credit score.
Moreover, you need to make sure to keep your current loans, liabilities or obligations out of collections or default. For many recent graduates, this is not possible with a slow economy and getting the cheapest interest rate will mean getting a cosigner.
Finally, most lenders prefer a debt-to-income ratio of less than 40%, so be careful with credit card debt and auto loans that will increase your overall debt-to-income ratio.
How Refinancing Student Loan Debt Can Save You Money
With the lower interest rates and shorter payment terms, potential borrowers are looking at saving thousands of dollars over the life of their student loans. You can use just about any loan calculator available on the web to calculate your savings, and even with just a few percentage points, your loan savings will amount to thousands of dollars.
For example, in 2015, the average amount of debt for graduating students was just north of $35,000. With average interest rates for undergraduate loans currently at 4.5% and graduate student loans charging 7%, a 10-year undergraduate student loan will cost $362.73 per month.
At the end of the loan period, you will have paid $8,528.13 in interest, for a total payment of $43,528.13. At 7% for 10 years in the case of graduate student debt, your payment will be $406.38 each month. The total interest paid will be $13,765.66, for a total amount of $48,765.56.
However, refinancing to 3.5% on your undergraduate loans will save you $1,996.07, while refinancing your graduate student loans to 3.5% will save you $7,332.60 in interest payments!
The Best Student Loan Lenders For Refinancing Debt
There are many refinancing options out there. It is always important to shop around before deciding which to choose. The following are three of the most popular student loan lenders worth reviewing.
SoFi has been around since September of 2011. It was founded by four students at the Stanford Business School. They are not a bank and their primary goal is to offer lower interest rates to professionals who are in the early stages of their careers.
According to LendEdu, SoFi has no origination fees and prepayment penalties and their loan terms are 5, 10, 15, or 20 years. The company also has very low interest rates. Their fixed rates range from 3.50% to 7.49%, while their variable rates range from 2.13% to 5.68%.
If you would like to add a cosigner, you must call SoFi directly. However, in order to get the lower rates, not only do you need to have excellent credit, you also need to enroll in their auto-payment program.
Earnest was founded a few years after SoFi in September of 2013. Since then, the company has come a long way, recently raising $275 million in funding. One of their most useful features is their online dashboard that gives borrowers the ability to control and customize their loan payments. This can be done by controlling the payment amount and length of time.
Earnest has a unique, six-step application where the company analyzes more than 80,000 data points on each potential borrower. This allows Earnest to go beyond just a credit score and credit history, which is beneficial for borrowers with a less-established credit history. Earnest has the most advanced and unique eligibility criteria out of all the lenders.
Earnest offer fixed interest rates ranging from 3.5% to 7.5% and variable interest rates from 1.9% to 5.75%. The available loan terms range from 5 to 20 years. Earnest has eliminated all origination, application, and prepayment fees.
Citizens Financial Group is the 13th largest retail bank in the nation with over $130 billion in assets, $100 billion in deposits, and 1,200 local branches. Though they are not just a lender, Citizen’s Bank opened up its student loan refinancing program in early 2014.
To compete with Earnest, Citizen’s Bank eliminated all application, origination, and disbursement fees. The company offers fixed interest rates ranging from 4.74% to 9.39% and variable interest rates from 2.17% to 7.92%. Their loan terms are 5, 10, 15, or 20 years. Furthermore, borrowers can save another 0.5% if they have a pre-existing, qualifying account at Citizen’s Bank and sign up for auto-pay.
Paying Off Student Loan Debt
If you’re going to college, you’re likely going to have student loans. Chances are, these loans are going to be federal ones, and your interest rate may be higher than it should be, which means you’ll be a good candidate to refinance your loans after you have secured a steady job.
When choosing your new lender, keep in mind that the most competitive ones are all very similar in their lending terms and interest rates. While there is a good chance you’ll need a cosigner to get a loan with the lowest interest rate, refinancing your student debt will ultimately save you thousands of dollars in interest payments in the future. It is free to apply for refinancing so if you have student loans, there is no risk in seeing what savings may be available.