Refinancing Student Loans: What’s Lost, What’s Gained

    Refinancing Student Loans: What’s Lost, What’s Gained

    By Amy Fontinelle

    Americans owed $1.23 trillion in student loans at the end of 2015, according to data from the Federal Reserve Bank of New York.1 Students have taken on this debt for good reason: a bachelor’s degree increased median household earnings by $23,000 in 2014, the New York Fed reports.2 But if you don’t find the best way to repay your school loans, you could throw away thousands of dollars over the years.

    Refinancing your student loans can lower your monthly payment; reduce the total interest you pay over time, help you get out of debt faster, or some combination of these depending on the provider and the terms (three examples are discussed below).

    Of course, depending on the kind of student loans you have, refinancing could change some terms of repayment for individual loans and should be investigated before going through the process. So understanding the terms of your student loans and the refinancing possibilities is critical.

    There are two types of student loans: federal loans, which are made or guaranteed by the U.S. Department of Education, and private student loans, which come from sources such as banks, credit unions, and online lenders. Federal loans include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans (for parents of dependent students).

    If you’re thinking about refinancing your federal student loans to get a lower interest rate, it’s important to understand the borrower protections you may lose if you refinance with a private lender. (Related: Paying for College: Direct Student Loans.)

    Income-Based Student Loan Repayment

    If your monthly student loan payment is higher than you can afford because your income is too low, you may be eligible for one of four income-based repayment plans: the Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), or Income-Contingent Repayment Plan (ICR Plan). For example, under PAYE, recent grads can apply to have their student loan payments capped at 10 percent of their discretionary income, according to the U.S. Department of Education.

    Interest Subsidization

    Direct subsidized loans, also called Stafford loans, are available to undergraduates who demonstrate financial need. If you have one of these college loans, the U.S. Department of Education will pay your loan interest while you’re in school at least half-time, for the first six months after you leave school, or during a period of loan deferment, according to the DoE’s website.

    Student Loan Forgiveness for Careers in Public Service

    You may qualify for the Public Service Loan Forgiveness Program if you work full-time for a government or not-for-profit organization or serve full-time in AmeriCorps or the Peace Corps. Once you’ve made 120 payments on your Direct Loans under qualifying repayment plans, which include all of the income-based repayment plans, the rest of your balance may be forgiven if you aren’t in default on your loan.

    The Teacher Loan Forgiveness Program may forgive up to $17,500 in federal subsidized or unsubsidized loans (but not PLUS loans) for teachers who work full-time for five consecutive years in a low-income elementary or secondary school or educational service agency.

    Deferment and Forbearance

    Deferment lets you postpone payments on your loan for up to three years without accruing interest during the postponement if you have a Direct Subsidized Loan, Subsidized Federal Stafford Loan, or Federal Perkins Loan. Other types of federal student loans are also eligible for deferment, but they continue to accrue interest during the deferment period. Deferment may be an option if you’re attending school at least half-time, if you’re unemployed, if you’re serving in the military, and under certain other conditions that make it difficult to pay your loan.

    If you don’t qualify for a deferment, you may qualify for forbearance. It’s a temporary suspension or reduction in your student loan payments for up to 12 months because of a financial hardship or illness. Interest continues to accrue during forbearance and is added to your loan balance.

    Discharge Upon Death or Permanent Disability

    Federal student loans are discharged when the borrower dies. Parent PLUS loans may be discharged if the parent dies or if the student the loans were for dies.

    Borrowers who become totally and permanently disabled will have their Direct Loan, Federal Family Education Loan, or Federal Perkins Loan forgiven.

    Losing Federal Student Loan Benefits When Refinancing with a Private Lender

    “Borrowers who refinance federal student loans are not eligible for any of these benefits, so they really need to consider the trade-offs before refinancing,” said Andrew Josuweit, CEO of Student Loan Hero, a website that helps borrowers manage and pay off their student loans, in an interview.

    “Borrowers should realize that they can pick and choose which student loans to refinance; they are never forced to refinance all of their student loans,” he said. “This means that they can choose to only refinance private student loans and leave federal student loans alone, or they can include some, but not all, federal student loans when refinancing."

    Private Refinancing: What’s Available?

    A variety of banks and financial institutions offer student loan consolidation and refinancing services. The range of services differs from firm to firm as well as the fees, interest rates, and loan terms they apply; but there some basics that most offer.

    For example, take these three low-rate student loan refinancing companies. Each allows borrowers to refinance both federal and private student loans as well as parent PLUS loans, all with no origination, application, or prepayment fees.

    SoFi

    SoFi offers student loan refinancing for loans of at least $5,000 up to the full balance of your qualified education loans, according to the terms on its website. As of this writing, fixed rate loans cost 3.5 percent to 7.74 percent APR; variable rate loans cost 2.14 percent to 5.94 percent APR with caps of 8.95 percent or 9.95 percent APR, depending on your loan term. To get these rates, borrowers must sign up for an automated payment plan with the company (autopay). If you don’t, your rate will be 0.25 percent higher. Loan terms of 5, 7, 10, 15, and 20 years are available. To be eligible, you must be the age of majority (18 in most states), have graduated from college, and be employed or have an offer letter for a job starting within 90 days. SoFi does allow cosigners if you need a boost to help you qualify for a loan. SoFi does not allow married couples to combine their student loans when refinancing, but one spouse could cosign on another’s loan, according to a spokesperson. SoFi student loan refinancing is not available to Nevada residents.

    Earnest

    Earnest will refinance student loans of $5,000 to $500,000, according to the terms on its website. With a 0.25 percent autopay discount, this lender offers fixed rates of 3.5 percent to 7.05 percent APR and variable rates of 2.13 percent to 5.41 percent APR with caps of 8.95 percent, 9.95 percent, or 11.95 percent depending on your loan term and state of residence (quoted rates are as of this writing). Choose a 5-, 10-, 15-, or 20-year repayment term or something in between. Earnest offers borrowers considerable repayment flexibility: you can choose your monthly payment amount and the number of months you need to repay your loan. You can also make biweekly instead of monthly payments to reduce your total interest costs.

    To be eligible to refinance your student loans with Earnest, you must be at least 18 and your debt must be for a degree you’ve already completed or will complete at the end of the present semester. You also must be employed or have a written job offer. Earnest will let you apply with a cosigner if you can’t qualify on your own. Earnest does not allow married couples to combine their student loans when refinancing. Earnest doesn’t make loans in every state and only makes fixed-rate loans in some states (see if Earnest offers refinancing in your state before you apply).

    Purefy

    Purefy will refinance $20,000 to $350,000 in student loans; doctors and dentists may be eligible to refinance higher amounts, according to the terms on its website. As of this writing, fixed interest rates range from 3.95 percent to 6.75 percent APR; variable rates range from 3 percent to 5.2 percent APR and are capped at 18 percent if interest rates increase substantially in the future. Opening a Purefy checking account gets you a 0.5 percent discount on your interest rate, or you can get a 0.25 percent discount for auto-paying your loans from another bank’s checking account. Loan terms of 5, 8, and 12 years are available on fixed-rate loans; terms of 5 or 8 years are available on variable rate loans. Purefy lends in all 50 states.

    To be eligible to refinance with Purefy, you must be at least 23 years-old. You also must have graduated and have two years of work experience; the work experience requirement is waived for new doctors and dentists.

    Purefy encourages borrowers to refinance with a cosigner if the cosigner has a higher credit score so the borrower can get the lowest possible interest rate. A cosigner is required if your income is between $25,000 and $41,999 or your credit score is between 670 and 699. Cosigners may be released after 12 months of on-time payments if the borrower maintains a strong credit and financial profile. Married couples can refinance their loans into a single loan.

    Private Student Loan Benefits

    While you’ll lose all the borrower protections associated with federal student loans when you refinance with a private lender, some private lenders offer their own forms of assistance if you experience economic hardship.

    Through its Unemployment Protection Program, SoFi will temporarily pause your payments for up to 12 months and help you find a new job if you become unemployed involuntarily. Earnest may allow you to defer your loan payments if you enter graduate school or the Peace Corps or serve in the military on active duty, and it may grant forbearance if you lose your job, your employer reduces your income or your essential expenses (such as medical bills) go up substantially. Purefy’s website states that if you lose your job or experience another extreme hardship such as a serious illness, death, or job loss, the company will consider your request for deferment or forbearance. Navy Federal Credit Union and Common Bond also say they offer temporary forbearance due to economic hardship.

    With either deferment or forbearance through these private lenders, interest still accrues while you aren’t making payments, unlike with federal loans, which sometimes don’t accrue interest during a deferment.

    Explore Your Options

    There’s no guarantee that any lender will offer you better terms on your school loans than you have now, but it’s worth shopping around because you could save thousands. Make sure to compare not just your old and new monthly payments, but also your old and new lifetime borrowing costs, to see if you’ll come out ahead in the long run. That being said, sometimes you have to choose the option that’s cheapest in the short term because your cash flow is limited. If your financial situation improves later, you can always refinance again or make additional principal payments to get your loans repaid faster and reduce your total interest costs.

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    1 Federal Reserve Bank of New York, “Household Debt Grows Modestly,” press release, February 12, 2016.

    2 Federal Reserve Bank of New York, “Student Loan Borrowing and Repayment Trends, 2015,” April 16, 2015.

    The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel.

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