Americans owe $1.2 trillion in student loan debt — at interest rates, typically, of 3.4 percent to 6.8 percent on federal loans, and up to 14 percent on private loans. According to Sofi, a leader in the business of student loan refinancing, customers save an average $14,000 by refinancing their loans.
They’re also making their day-to-day lives easier. Research has shown that young people are putting off getting married, buying homes, even having children because of their debt burdens, which average about $30,000 coming out of school — but easily soar into the six figures for people with graduate degrees.
So, how do you know if this route to free money is for you?
Step 1: Take stock.
Before you make a move, you’ll need to understand what types of loans you have and what interest rates are. You can look up your federal loans on the National Student Loan Data System at nslds.ed.gov. Call your private lenders if you need to gather that information from them.
Step 2: See if you can do better.
These days both banks and non-banks are in the business of refinancing loans. Rates are available as low as 3.5 percent on fixed rate loans and and as low as 1.9 percent on variable rate loans. (You can bring these rates down even further by electing to have your loan payments automatically drafted from your bank accounts).
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Step 3: Look at each loan in your portfolio separately.
Most students have loans at a variety of interest rates. Some of those loans might benefit from being refinanced into a private loan — but others may have interest rates lower than the rate you’re being offered in the marketplace. This is not an all or nothing proposition. You can keep the ones where it doesn’t make sense out of the deal. You need at least a 1 percent decrease in the interest rate on an individual loan to make it worthwhile.
Step 4: Consider what you’re losing.
Costs and interest rates shouldn’t be the only factors that play into your decision. Federal loans have protections including flexible repayment provisions — things like "income-based repayment" and forbearance – that are provided by law. They can be discharged (i.e. cancelled) in the event of death and some disabilities and you have the opportunity of loan forgiveness after 10 years if you’re in a public service career. And note: A new and improved version of the pay-as-you earn repayment plan is coming this fall. Called "Repaye," it will cap your payments at 10 percent of what you earn above 150 percent of the federal poverty line ($17,655 in 2015). After 20 years (25 if it’s a grad school debt), any remaining debt will be forgiven. Make sure you will not use these benefits before you give them up — or keep your federal loans out of the mix.
Step 5: Consider your credit.
Unlike most federal loans — which don’t depend on your credit history — private loans typically do. If your credit isn’t great, you’re not going to be offered the lowest of the low rates. But don’t panic just because rates are likely going to start to rise; experts expect them to go up slowly. It may make sense to work on your credit for the next 6 to 12 months if you think you can improve it. The other option is look for a different sort of underwriter. SoFi bases its lending decisions primarily on whether you graduated from college, are employed, and make enough money to repay the loan — a number that’s based on the cost of living where you reside and your other obligations. So even if you don’t have much of a credit history at all they can be willing to work with you.