There’s a largely untapped solution for many of the millions of Americans who carry student loan debt: refinancing.
Student loan refinancing means replacing existing student loans with one, new loan — ideally with a lower interest rate. Of the more than $1 trillion in outstanding federal and private student loan debt, $211 billion is eligible to be refinanced at a lower rate, according to the most recent estimate by Goldman Sachs.
The Department of Education, which owns more than 90% of student loan debt, doesn’t refinance college debt. But you can refinance student loans — both federal and private — through private lenders.
SoFi, the San Francisco-based lender, began popularizing student loan refinancing when it launched in 2012. Today, many online lenders, banks and credit unions refinance both federal and private student loans.
Borrowers with excellent credit who are saddled with high interest rates — like the 6.8% on unsubsidized federal student loans issued between 2006 and 2013, for example — can save thousands by refinancing. Here’s what they need to know.
Lenders seek low-risk borrowers
Unlike federal student loans, refinanced student loans are credit-based. Lenders look for low-risk borrowers who are unlikely to default. Specifically, they seek borrowers with:
- Good credit scores. Lenders look for credit scores in the high 600s or 700s.
- A history of on-time payments. Lenders look for substantial credit history.
- Enough income to afford debts and expenses. Lenders might consider a low debt-to-income ratio or high projected earnings.
Physicians, dentists, lawyers and MBA graduates are generally excellent candidates for student loan refinancing because they have high earning potential and a lot of college debt.
Every lender has different underwriting criteria; compare rates from multiple refinance lenders to find the lowest rate you qualify for.
More debt, more savings
Borrowers’ savings depend on the rate they qualify for, the amount they’re refinancing and the term length they choose. A student loan refinance calculator can help you estimate potential savings.
For instance, the typical undergraduate leaves college with about $30,000 in debt. With a 7% interest rate, they’d pay about $348 per month and almost $42,000 over a 10-year repayment period. Lowering that rate to 5% saves $30 a month and more than $3,600 total.
With more debt, the savings are more dramatic. The typical doctor graduates owing about $225,000 in undergraduate and medical school loans. If the doctor switched from a 7% interest rate to a 5% rate, he or she would save about $225 a month and more than $27,000. Say the doctor qualifies for a 4% rate — the savings would be more than $330 a month and about $40,000 total.
Refinancing isn’t right for everyone. Most people have federal student loans, which come with benefits that disappear when they’re refinanced through a private lender.
For instance, federal loans are eligible for income-driven repayment plans, which cap a borrower’s monthly payment at a percentage of income. These plans can be lifelines for low- and middle-income borrowers, but refinanced loans aren’t eligible.
Similarly, refinanced loans don’t qualify for the government’s Public Service Loan Forgiveness program, designed to help public servants pay off college debt. That means student loan refinancing often isn’t the best option for teachers, nurses and other government or nonprofit employees.