How to Refinance Your Student Loan Debt

02/27/2017 07:55 pm ET

Americans now owe more on student loan debt than on credit card debt. And they’re getting smarter about dealing with that debt. Just as cardholders routinely shift balances to lower rate cards, and homeowners refinance their mortgages, there is suddenly a booming market in helping graduates refinance high-rate student loans – both Federal and private -- to save a small fortune in interest costs.

In fact, there are so many sources of student loan refinancing that two college students, who themselves have student debt, started an online clearinghouse to provide transparency in the student loan refinancing market. LendEDU.com, started just three years ago, is designed to instantly compare refinancing offers for you from companies like SoFi, Citizens Bank, LendKey, CommonBond, Earnest, College Ave, and others. Their online platform lets grads compare rates, terms, and qualification requirements to refinance student loans. (There are no fees to refinance student loans.)

It’s a huge opportunity. There are 44 million people still repaying student loan debt. LendEdu.com, which has become the “Travelocity” of comparing student loan repayment deals, estimates that one third of those people, are paying interest rates well over 7 percent – some as high as 12 percent. But only two percent of borrowers refinanced last year. In fact, says LendEdu CEO and co-founder Nate Matherson, most grads don’t even know about the possibility of refinancing student debt.

Here are some interesting statistics from LendEDU’s recent report based on its database of more than 23,000 individuals who applied to refinance loans in 2016:

· The average FICO score of those who refinanced was 757, reflecting the requirement that borrowers have good credit. But some applicants were approved with scores as low as 560.

· The average interest rate received after refinancing was 4.82 percent (including discounts for automatic deduction payments).

· The average loan amount refinanced was $53,000, but many providers have no maximum limit on the amount of debt to be refinanced.

Saving on Interest

The potential savings on interest costs are significant. Federal student loans carried a rate of 6.8 percent from 2006-2013, parental PLUS loans were several percentage points higher, and private student loans sometimes cost as much as 12 percent!

Refinancing $50,000 of student debt down from 6.8 percent to 4.82 percent (the average) could save the borrower nearly $6,000 over ten years.

And refinancing $50,000 of 10 percent debt over the same period would give an interest savings of more than $16,000.

Considerations For Refinancing Student Loans

Before considering refinancing, here are five key things you should know:

1. Federal student loans offer some special protections, including forbearance and income based repayment plans, as well as public service loan forgiveness after 10 years of on-time repayments, which disappear when you refinance.

2. Co-signers help your chance of a refi. Having a parent, spouse, sibling or relative co-sign your loan can make the deal go through, and at a lower rate.

3. Parents PLUS loans can be refinanced as part of a complete student loan refi – but the parent will likely have to be a co-signer on the new loan. (Note: this type of refi is the only way a parent can get off a PLUS loan.)

4. Consider the loan “term” (length of loan) carefully. Stretching to a longer term can result in lower payments. But a shorter term will save more interest. At LendEdu, the most popular refinancing term is 5 years – reflecting the higher cash flow and credit status of those who first recognized the refinancing opportunity.

5. Consider a variable rate deal if you take a short-term loan. Yes, rates are likely to rise. But variable rate loans typically start at about two percentage points lower than a fixed rate loan. So if you can stick to the 5-year repayment schedule you’re likely to come out ahead.

Even if you are years out of school, it’s worth refinancing your student loans to save money on interest. Consider this your opportunity to let your education pay you back. And that’s The Savage Truth.

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