Like many college graduates, Nicole Ludke, who now works as an audiologist, couldn’t go to the mailbox many days without spotting a pitch suggesting that refinancing her student loans was a smart idea.
“I was receiving refinancing information in the mail from various companies at least once a week,” said Ludke, 29, who graduated in 2008 from Wayne State University with a bachelor of arts degree in communication sciences and disorders. She received a doctorate in 2012 from Western Michigan University in audiology.
Last summer, she looked into one refi promotion to try to save money. While the advertised rate sounded tempting, she was offered a higher rate that didn’t make sense for her once she dug deeper into the deal.
A few months later, though, she researched three different offers at Credible.com, a marketplace of lending offers. And she ended up refinancing $40,000 in student loans last December to a low fixed rate of 3.99 percent – down from 6.55 percent – through Citizens Bank.
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Now, Ludke pays $738 each month toward her student loans.
She agreed to a plan that involved paying $65 extra each month as a way to eliminate her student loan debt in five years, instead of six. She’s expecting to save $4,500 in interest payments over the life of the loan.
“It’s a pretty big payment every month. It would be nice to just get rid of it. It would be one less thing to worry about,” said Ludke, who now lives in suburban Detroit.
Refinancing student debt is an idea that’s been building buzz for roughly five years. Online startup SoFi, which targets the 25- to 45-year-old customer, initially began offering graduates with MBA loan debt and others with high-paying jobs a chance to refinance student loans. SoFi stands for Social Finance and offers networking and mentoring programs, as well as financial services.
Plenty of other lenders now offer refinancing programs, including Citizens Bank, College Ave, Earnest, and EDvestinU.
But lenders aren’t chasing everyone’s college loan debt. They’re looking at paychecks and degrees – not for college dropouts and others struggling to make payments.
“Like credit card offers, advertised rates are often reserved for the highest-income borrowers,” said Rohit Chopra, senior fellow for the Consumer Federation of America.
Typically, lenders limit the best offers to borrowers with the best credit scores and best earning potential.
“It is a form of cream-skimming, where they are targeting the borrowers who are least likely to default and most likely to be profitable,” said Mark Kantrowitz, publisher and vice president of strategy for Cappex.com.
In general, Kantrowitz said, the average FICO score among borrowers who refinance private student loans is about 750 or more, and many times, the average income of borrowers is in the six figures.
What lenders are promoting is risk-based pricing. While you might spot an APR rate of 2.5 percent or 3 percent for a variable-rate student loan as part of a refinancing program, your rate might be closer to 8 percent if you’re not creditworthy.
Even so, many lenders say the product can work for many who have good jobs and want to pay off student loan debt.
“Overall, student loan refinancing has been a positive innovation, especially for borrowers stuck with high-rate private loans,” Chopra said.
“Many of these borrowers have seen their credit score rise, and refinancing can help them get rewarded.”
Lenders are marketing heavily to college grads and their parents who took out student loans for them, including the federal Parent PLUS loans, because some lenders say borrowers don’t even know their options.
“Our biggest challenge is still general awareness,” said Christine Roberts, head of student lending for Citizens Bank, based Providence, R.I.
Citizens Bank has been offering refinancing for student loans for almost four years via an online platform and through its branches.
Borrowers who can benefit the most tend to have student loans that were taken out several years ago when rates on many federal loans were much higher, say 7 percent-8 percent. Borrowers with private student loans could have high rates worth refinancing – if their credit is good.
Undergraduate federal student loans issued for the 2016-17 school year, by contrast, are at a fixed 3.76 percent rate and graduate or professional rates on federal student loans are at 5.31 percent. It’s likely that such low fixed rates would not be worth refinancing, experts said.
Mike Brown, a research analyst for LendEDU, another online marketplace for refinancing student loans, said those who are graduating from college this spring could have high rates on private loans. But new grads shouldn’t jump into refinancing because it’s important to build a strong credit score to get a low rate when you do refinance.
Citizens Bank claims on the top of its website that its customers have saved an average of $1,584 per year by refinancing their student loans. The fine print notes: The average savings is based on 57,772 actual customers who refinanced federal and private student loans between Jan. 6, 2014, and Jan. 31, 2017.
And the website notes that your actual savings will vary based on the interest rates you’d qualify to receive, your loan balance and remaining repayment term of the loans that you’re seeking to refinance.
Bottom line: You won’t always save money refinancing in the long run. Borrowers who refinance their student loans for a longer period of time could pay less per month but much more over time. Borrowers who refinance for the same amount of time or less time at a lower interest rate would pay less interest over time. The shorter the repayment term, the higher the monthly payments.
Lenders may offer a five-year, 10-year, 15-year or 20-year repayment term.
“The product is not right for everyone,” said Stephen Dash, founder and CEO of San Francisco-based Credible.com. Think of Credible as a Kayak.com of sorts for student loans, not travel.
Some borrowers might lose out, too, if they don’t evaluate some benefits they have with federal student loans.
“Borrowers with federal loans need to be careful since they’re signing away their rights to special protections if they refinance into a private loan,” Chopra said.
One drawback: Borrowers who hold federal student loans and consolidate into private student loans give up attractive deferment and forbearance plans, loan forgiveness options and income-driven repayment plans. By applying for an income-driven repayment plan, a borrower can obtain a monthly payment amount that is intended to be affordable based on your income and family size.
“What happens when people get into trouble?” said Persis Yu, director of the student loan borrower assistance project at the National Consumer Law Center.
Refinancing private student loans can carry less risk, Yu said, because federal student loans have more protections for those who lose a job and need a reprieve. If you’re refinancing, she said, it helps to have savings in case challenges crop up.
Ludke said she knew she was giving up any possibility for an income-based repayment plan when she refinanced federal loans. But she’s confident in her career and her job opportunities.
“I looked at what I would be saving in the long run,” Ludke said.