Personal Finance

Refinancing student loans can give you breathing room. Here's when it makes sense

Key Points
  • Refinancing student debts can bring down the interest rates and reduce what you pay over the life of your loans.
  • Beware that moving to a private lender also means sacrificing some of the perks of federal loans, including income-based repayment and forbearance.
  • Before making such a move, be sure to assess your personal financial risks and complete a thorough background check on every lender you consider.
Student loans
Student loans

When Teresa Ruiz Decker made the last payment on her student loans in June, she brought her four-year-old daughter to the computer to click the pay button.

"She doesn't understand," Decker said. "But my husband and I, we were just over the moon."

The triumphant moment came after years of payments after Decker graduated from the University of Southern California Annenberg School for Communication and Journalism.

Even with the help of scholarships, she had about $60,000 in loans.

After consolidating her debts from her undergraduate and graduate degrees, her interest was about 6 percent. Her payments each month were about $380.

She was shocked to see that those payments barely made a dent in her balance.

"That was sort of like a turning moment for me," Decker said. "I told myself I'm not going to do this for the next 25 years."

After putting all the money she could toward her loans, Decker eventually brought her balance to just under $30,000.

"I was exhausted from trying to throw so much energy towards this problem," she said.

Teresa Ruiz Decker says refinancing her student loans helped her to pay them off.

It was then that she discovered a solution: refinancing her debt.

By working with lender CommonBond in April 2016, she was able to reduce her interest dramatically.

"It was a relief just to see that my payments were actually making a difference," Decker said.

While many lenders offered similar rates to refinance, CommonBond stood out because they also have a social mission. The company works to provide technology to schools in the developing world with every loan it funds.

Refinancing her student loans was a positive experience, Decker said.

"I feel really grateful that I've paid off my student loans now," Decker said. "It wouldn't have happened if I hadn't refinanced."

CommonBond is just one of several companies that have emerged to help students reset the terms of their loans. Outstanding student loan debt has reached a record $1.5 trillion. As various lenders compete, there are some key things to keep in mind.

Beware the risks

Because federal loans offer debtors the ability to provide lower payments and more flexibility if they run into trouble making payments, it often does not make sense to refinance with a private lender, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a provider of free advice and help with dispute resolution for student loan debtors.

"Even if the borrower is in a position where they might be able to get a lower interest rate on their federal loans by refinancing into the private program, they have sort of lost their safety net," Mayotte said.

If you do refinance with a private lender, you should have at least a one-year emergency fund that can cover all of your bills, including your student loans.

You also want to make sure that you have a good financial history, including a solid credit score, a good debt-to-income ratio and a record of at least a couple of years of making your student loan payments on time. Otherwise, your interest rate could go up instead of down, Mayotte said.

Also be sure to do a thorough online background check on your lender, including what other debtors have said about them.

"The review process is your friend," Mayotte said. "Keep in mind that this is debt, so there's always going to be people who have their angry pants on."

Red flags include a high volume of complaints or indications their customer service is poor.

Also search to see if there are significant lawsuits or Federal Trade Commission actions against them, Mayotte said.

New lending features

Some of the private lenders who have emerged aim to create a unique experience to differentiate themselves.

At CommonBond, where you can refinance loans ranging from $5,000 to as much as $500,000, part of that experience includes a program for debtors who find themselves in economic hardship, according to co-founder and CEO David Klein.

That includes helping borrowers to postpone their payments for three months at a time for as long as 24 months.

SoFi, another lender, provides its borrowers with free career counselling and access to a team of financial planners, according to Bob Buch, vice president of sales and development.

The company also arranges for meetups and networking events.

Student debt could hold back economic growth, Fed chief says
Student debt could hold back economic growth, Fed chief says

Reducing your debts

For those who have decided that refinancing is right for them, it can significantly reduce their financial burden.

Douglas A. Boneparth, president and founder of Bone Fide Wealth, knows this first hand.

Boneparth, 33, first refinanced his business school loans with First Republic Bank, which offers private loans for individuals who want to change the terms of their student debts.

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Once Boneparth felt sure his family would not need to rely on the flexibility of federal loans, he moved his wife's debt over, too.

Now their $320,000 balance has been refinanced from a 30-year payment plan at 7 percent interest to a 15-year note at 3.5 percent.

"We'll be student-debt-free in our late 40s, as opposed to our early 60s," Boneparth said. "You can actually see the light."

If you are thinking of refinancing, you should make sure you will not need the forbearance or income-driven plans that federal loans offer. You also cannot participate in the Public Student Loan Forgiveness Program.

"Before you commit to refinancing your loans privately, you want to be very secure in your financial position," Boneparth said.

For Decker, refinancing and repaying her loans has given her new financial freedom.

After she was laid off last year, she felt confident enough to start her own communications business.

Her only regret, she said, is not refinancing sooner.

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