Refinancing your student loans

Student loans are a strange beast. They don’t really look, feel, or behave like other loans. They’re placed in the hands of consumers with no proven ability to repay them. They can grow to massive size, despite being unsecured by any sort of collateral. They can’t be shaken loose by delinquency, default, or even bankruptcy.

There’s also this – historically, borrowers haven’t been able to refinance student loans in the same way you might refinance a home loan or an unsecured personal loan. The loan you agreed to as a college student was the loan you lived with until it was paid in full, usually decades later.

That’s beginning to change. Increasingly, start-up companies are diving into the business of student loan refinance. Where traditional lenders have never shown much interest in student loans, these new lenders see potential. But is that a good thing? And are you a good candidate for student loan refinance?

Cream of the crop

Lending money – generally speaking – is all about balancing risk and reward. That’s why “risky” borrowers (those with poor credit scores or other credit red flags) are often saddled with higher interest rates and larger fees. If a lender has just cause to think you might be at risk of defaulting on your loan, they’re going to do everything in their power to make the most money off your account up front.

Student loans, by their very nature, are risky. They’re unsecured, sizable, and belong to consumers who often aren’t as financially stable as they’d like to be. Because of this, student loan refinancers in the market today are almost exclusively interested in “safe” borrowers. That means borrowers with established jobs, high incomes, great credit scores, and superb prospects going forward. If you’re a new doctor fresh out of a medical school, chances are pretty good you can find an attractive rate on a student loan refinance. For the rest of us…

Expanding marketplace

Thankfully, that über-selectiveness will start to diminish as more lenders get into the business of student loan refinance. One of the most promising developments is the rising popularity of state loan authorities.

State loan authorities are education-focused, nonprofit agencies offering student loan rates comparable to private companies. At present, there are nonprofit loan authorities in Alaska, Connecticut, Iowa, Kentucky, Louisiana, Massachusetts, Minnesota, New Hampshire, New Jersey, Rhode Island, and South Carolina.

If you’re serious about refinancing your student loans, your available options should be expanding in the coming years. In the meantime, do your best to build your credit and stay current with your existing loans.

Is refinancing right for you?

Even if you’re struggling with your monthly student loan payments, refinancing may still be a horrible idea for you. That’s because there’s presently no way to refinance federal student loans within the federal system. If you have federally-backed loans and you refinance with a private lender, you will almost certainly lose all of the benefits that come from having federal student loans, such as:

• Access to income-driven repayment plans. Many federal student loans are eligible for special income-based repayment plans, where the amount of your monthly payment is determined by your income.
• Access to loan forgiveness programs. Depending on your profession, as a federal student loan borrower you may be able to have the remainder of your student loan debt forgiven after making on-time payments for a certain number of years (usually between 10 to 20).
• Access to interest subsidies. Many federal loans include interest subsidies, which prevent you from being charged interest on applicable loans while you are still in school or while the loan is in deferment.

Losing these benefits can be extremely costly, so if you’re considering refinancing a federal student loan, weigh your options carefully. And if you aren’t taking advantage of these available programs, that should be your first step if you’re struggling to make your payments. Be sure to visit StudentLoans.gov for more information, or consider speaking with a trained student loan counselor if you need one-on-one advice and assistance.

Whether you have private loans or federal loans, it’s important that you understand your options and do the best you can to stay current with your payments. Once you start to fall behind, your options begin drying up, so try to stay ahead of any potential problems and seek help sooner rather than later.