The Federal Reserve interest-rate cuts last year did more than encourage homeowners to refinance their mortgages. It has people who are paying back student loans looking at refinancing that debt, too.
If borrowers are still paying high interest rates on their student loans, they should at least investigate the possibility of refinancing, according to personal finance officers and lenders. And if they’ve already consolidated, they can still refinance into a private loan if it makes sense.
Depending on when the loans were issued, people may be carrying higher interest rates on those loans than they should. And new online services have entered the market, offering competitive rates, and many consumers have responded.
Citizens Bank is among the largest lenders nationally in student loan refinancing. As of the fourth quarter 2019, the bank had $4.6 billion outstanding in education refinance loans that it originated. This was an increase of $100 million from the prior quarter.
Those figures put Citizens in the lead position among banks, and second only behind the online lender SoFi Lending Corp., in annual originations, according to Christine Roberts, the head of student lending for Citizens.
Last week, Citizens offered a variable rate of 2.24% to 6.85% for education refinance loans, with a fixed rate of 3.27% to 6.99%.
The bank launched its refinancing arm in 2015, concentrating on private loans. It’s now expanded that effort to include refinancing of federal loans, and also will work with people who didn’t finish college but who still have to repay the loans, Roberts said.
“The federal portfolio has always been around ‘consolidation,’ but there is no rate or payment savings around that,” she said. “You’re still paying the same or more on the loan, depending on how you consolidated. It’s a weighted average of the outstanding interest rate.”
The bank offers flexible choices in repayment terms. People can choose to repay their refinanced loan in five years, seven years, up to 20, she said. There are no origination fees.
“Our mantra is we want you to pay as little as possible for your education,” Roberts said.
‘Seven is the magic number. If [the borrower’s current interest rate is] above 7%, you should look.’
ISABEL RODRIGUEZ, Capital Good Fund director of financial coaching
What’s a high rate for a student loan?
Anything above 7%, said Isabel Rodriguez, director of financial coaching at Capital Good Fund. The nonprofit, based in Providence, operates in five states and does not refinance education loans or provide direct lending for it.
But Rodriguez and other coaches are routinely counseling modest-income clients how to budget for it. And she guides clients through the conversations that have to happen with lenders.
“Seven is the magic number,” Rodriguez said of the threshold for borrowers to consider a refinancing. “If [the borrower’s current interest rate is] above 7%, you should look. [Also,] if your monthly payment for your student loan takes more than 10% to 15% of your income.”
For federal loans, a different payment option may be a possibility, whereby the borrower repays a smaller monthly amount based on their income. But for people who want interest-rate reductions, direct negotiations can happen with lenders, she said.
“We sit down with our clients and we guide them through the conversation, while the servicer is on the phone,” Rodriguez said. “We don’t do it for them but are teaching them at the same time.”
In the past several years, numerous online lenders have become prominent in student loan refinancing.
In Rhode Island, the nonprofit, quasi-state R.I. Student Loan Authority also offers education loan refinancing. The Warwick-based authority has a current fixed-rate refinancing option starting at 3.49% for qualified borrowers who use autopay. It does require that borrowers earn at least $40,000.
A comparison by the online personal finance company NerdWallet compared seven online lenders favorably for student loan refinancing, as well as the traditional option of Citizens.
SoFi, which is based in California and has no retail locations, won points for working with people who hadn’t completed an associate or a bachelor’s degree.
SoFi, which lends in Rhode Island, has refinancing loans with variable rates starting at 2.31% for five-year terms with autopay. For fixed-rate refinance loans, SoFi offers rates beginning at 3.2% for a five-year term. Interest rates rise as the length of repayment increases.
A SoFi spokeswoman told Providence Business News recently that no one was available for an interview.
Citizens won praise from NerdWallet for refinancing loans taken out by borrowers who did not ultimately complete their education.
Roberts, of Citizens, said the institution made that decision because, although as borrowers they may be a higher risk, it shouldn’t disqualify them from refinancing.
“Just because you didn’t finish school doesn’t mean you’re not paying your bills,” Roberts said. “It doesn’t mean you’re not progressing in a career. It just means you didn’t finish school. We have risk-based models. And quite frankly, that person may not qualify for the 3.25 or the 3.5% rate, it may be 5. But it’s still better than 8[%].”
Rodriguez, of Capital Good Fund, said the strain of repaying high levels of student loan debt can weigh on people and wreak havoc with finances. She estimated more than half of the Capital Good Fund clients seeking financial counseling have student loans.
It’s not uncommon for people to file bankruptcy who have loan debt, even though student loans are typically not dischargeable in bankruptcy. “Some of them haven’t finished school,” she said. “They’ve racked up $50,000, $60,000 and it’s ‘Why did I even go to school?’ ”
Mary MacDonald is a PBN staff writer. Contact her at Macdonald@PBN.com.