Until recently, student loans were about the only lending market in the U.S. that didn’t provide options for restructuring credit. You can refinance your mortgage. Refinance your car. Consolidate your credit cards. But can you refinance your student loans?
Today, this just might be possible. I recently spoke with Brendan Coughlin, President of Consumer Lending for Citizens Bank, to find out more.
Options Until Now
Before the last five or ten years, people with student loan debt had only a few options. They could pay off their debt as-is, usually with several payments per month since student loans are often made on a per-semester basis. Or they could use a Direct Consolidation Loan from the Department of Education.
While consolidation loans can make paying off student debt easier and more streamlined, they really don’t save students much money. Sure, they come with flexible payment terms, which can be great when you’re just establishing your career, for sure.
But the interest rate for a Direct Consolidation Loan is just a weighted average of the interest rate for each disparate loan you’re consolidating. That is to say: you’re not saving anything on interest.
In today’s low-interest environment, though, graduates with decent jobs and good credit could save loads of money on interest by refinancing student debt, rather than consolidating through the Department of Education.
Related: 7 Ways to Refinance Student Debt
Options that are Available
According to Brendan Coughlin, student loan refinancing is more available now than ever. Banks like Citizens are beginning to offer student loan refinancing as part of their general services. And there are even services focused exclusively on this one goal popping up all over the place.
Why are these options coming up now?
For one thing, lenders are able to beat the federal government’s student lending rates by quite a good margin, in many cases. Citizens, for instance, offers APRs of 4.7% fixed and 2.3% variable as of this writing.
For another, lenders are beginning to realize that a student’s financial profile at eighteen just starting college is wildly different than that same student’s profile as a new graduate with a decent job.
“Once you’ve got a job and you have a steady stream of income,” says Brendan, “you’re likely to get a much better deal from a lender when you’re out of school compared to when you’re in school.”
Your credit profile isn’t really part of the process when you’re taking out federal student loans during college. Unless you’re taking out PLUS loans, which do require a decent credit score, the government may not even glance at your credit profile.
Because of this, you’re not at a disadvantage when you’re eighteen and still living with your parents and working part-time in the summer. But you’re not at an advantage when you graduate and land a great job, either. Instead, the government splits the difference by offering the same interest rate to everyone, based on when you take out a loan and what type of loan you’re using.
This can be a great deal at first, and may just be the thing that puts a college education within your reach. But when you’re out of school, you no longer have to play by these rules.
As soon as you’ve landed a good job, you may be able to refinance your student loans for a much lower rate, as long as you also have decent credit.
What About Your Credit Score?
Brendan made it clear that many very recent graduates can obtain student loan refinancing. However, your mileage may vary depending on your credit score and job situation.
“Typically what we see is that by the time somebody graduates, the average college student has already built up a small credit history,” he says.
In fact, your student loans are already part of your credit profile, even if you haven’t made a single payment. As long as you haven’t defaulted, they’re not counted against you. And sitting there on your credit profile, your student loans prove that at least somebody though it was a good idea to lend to you.
You may have an even better credit score if you used credit cards responsibly during college. If you used a small credit limit that you paid off monthly, your credit score could actually outstrip the U.S. average, even though you don’t have a mortgage yet.
And, of course, if you have your own car that you bought with a loan, you’ll have some credit built up from those payments, as well. Even if your parents or someone else cosigned on the car loan, on-time payments will boost your credit score throughout college.
What if you’ve done some of these things during your school years, but still have no idea what your credit score is? It’s a good idea to check before you apply to refinance your student loans. In fact, it’s a good idea to check your credit file annually, anyway, so start that habit now.
To check your actual credit score, go to myFICO.com, and pull your credit bureau report and score. It’ll cost you $19.95 for each credit bureau. If you’re strapped for cash, just pull one of them to get your score. Then, go to annualcreditreport.com and pull your credit reports for the other two bureaus.
What’s the difference? Your free credit report will just come with all the information that’s in your report, but won’t give you the score the credit bureau calculates based on that information. However, if the information across all three bureaus is accurate and relatively the same, the one score you pull from myFICO.com will give you a good idea of your actual credit score. You can learn more about how FICO scores work and why they may be calculated differently here.
So what score do you need to get your student loans refinanced? According to Brenda, Citizens Bank’s minimum credit score is 660.
If Your Score Doesn’t Measure Up
If your credit score isn’t above that 660 mark, you might be better off waiting to refinance your loans for a while. For a year or two, work to increase your credit score by:
- Making student loan payments on time, every time.
- Paying down any outstanding credit card debt.
- Using a credit card regularly, but keeping the balance at $0.
- Applying for another type of credit to add to your mix. If you have mostly student loans, add a small credit card. If you have several credit cards (hopefully paid off!), add a small personal loan.
- Waiting it out. The longer you have credit, the higher your score will rise automatically.
What About That Job?
When you take out a mortgage, you typically have to show that you have a stable job history. Lenders prefer, in fact, that you’ve been with the same company for at least a year. (Though this isn’t the case 100% of the time.)
When refinancing student loans through a program specifically for new grads, though, this may not be the case. According to Brendan, many times when the graduate has the minimum credit score, Citizens asks, “Do you have a job, and does it satisfy the ability to repay your loans? And if that’s the case, they’ll probably get approved.”
So you don’t need to have landed your dream job to make this work. But, frankly, flipping burgers probably isn’t going to cut it, either. If you have decent credit and at least an entry-level job in your field, though, it’s likely worth your while to apply for student loan refinancing.
How Much Could it Save You?
So why go to all this trouble to refinance your student loans when you could leave them alone? Or take ten minutes to consolidate them with a federal consolidation loan?
Because refinancing could save you some serious cash.
As an example, let’s run some numbers through this calculator. Let’s say you have $30,000 of student loan debt (a little less than the current national average for recent graduates). Your consolidation loan rate would be 6.8%, and you want to pay off the loan in ten years.
Under the federal consolidation loan, you’ll make monthly payments of about $345 per month, and you’ll pay a total of nearly $11,500 in interest.
So what if a lender can knock your interest rate down to 5.3% on a ten-year loan? In this case, you’ll pay about $322 per month, and pay a total of around $8,700 in interest. That’s a good chunk of change to save!
If you have killer credit and a high-paying job, you could qualify for rock-bottom rates. With Citizens, that’s currently 4.7%, though this rate will vary by lender. So if you qualified for Citizens’s best fixed rate loan, you’d pay just $313 per month and $7,700 in interest.
As you can see, just a few points in interest, which doesn’t sound like much, can make a huge impact over the life of a 10-year loan.
And you can get even better rates on shorter-term loans, which will also help you save more money over the long term. Or you could choose a variable rate loan, which has incredibly low interest right now, but could rise dramatically in the future. Just be careful if you decide to go this route.
Why It’s Not for Everyone
Since student loan refinancing can save you money, you might think we’d recommend it to everyone. But this is actually not the case. In some instances, you’ll save more, over time, by keeping your student loans with the federal government.
The best instance here is in the case of Perkins Loans, which can be forgiven entirely if you meet certain requirements after graduation. But even your everyday Direct Loans can be forgiven, at least in part, if you work as a teacher or public servant. Before you decide to refinance your loans, be sure to see if any student loan forgiveness programs might apply to you.
Also, federal student loans come with a host of other potential benefits, such as deferment and forbearance options for financial hard times and flexible repayment plans. If you’re in a volatile field or are trying to start your own business, sticking with a federal plan may work better for you in the long term.
Sure, it will cost more in interest if you make only the minimum payments. But it can also keep you from damaging your credit score during times of financial uncertainty, since you can more easily switch to an income-driven repayment plan or put your loans into deferment.
For this reason, Brendan says that Citizens does extensive counseling with its potential student loan refinance customers. They talk through the options and advise on which loans to refinance, and which to leave alone. If the lender you choose for refinancing doesn’t offer this option, be sure to do your own research so that you don’t make a mistake here.
The bottom line here is that refinancing student loans is now an option, and it’s one that most graduates should at least look into. It may not be for you. But on the flip side, it could save you thousands of dollars over ten or fifteen years.