Student loan debt is a tricky beast.
Not only do student loans now account for $1.2 trillion, student debt is currently the second biggest source of personal debt after mortgages.
The big difference between a mortgage and a student loan, however, is the fact that refinancing a mortgage is a (relatively) simple and well-known process, whereas student loan refinancing is a new and confusing option.
Thankfully, many new banks and other types of lenders have been popping up to fill this very real need for student loan refinancing. However, not all refinancers are made equal, and it is important to understand what costs are associated with your decision to refinance.
Consolidation vs. Refinancing
The first issue to understand on your journey to student loan relief is the difference between federal loan consolidation and student loan refinancing. The two options are similar and the terms refinance and consolidate are sometimes used interchangeably, but all borrowers ought to know the difference between them.
Federal Student Loan Consolidation
This option is just what it sounds like. Borrowers may consolidate multiple federal student loans into a single loan with a single repayment schedule. This kind of consolidation is only available for federal loans—you may not consolidate a private loan.
In general, federal student loan consolidation does not save you money, since you are charged the weighted average interest rate of all the loans being combined. However, consolidation can switch out a variable rate loan for a fixed loan, and it may lower monthly payments (although that usually means a longer payment term).
The main reason to consider a federal student loan consolidation is to maintain the benefits available to federal borrowers, such as Public Service Loan Forgiveness, income-driven repayment plans, and deferral and forbearance options.
Private Student Loan Refinancing
Refinancing a loan allows a borrower to apply for a new loan that is used to pay off one or more existing loans—which is remarkably similar to consolidation. The difference is the fact that you may refinance both federal and private loans, and you can potentially improve your interest rate and/or your monthly payment through refinancing.
Refinancing federal student loans does mean you are no longer eligible for the federal benefits. Also, refinancing could increase your monthly payment, depending on your repayment term.
Best Refinancing Options
Each of the following refinancing options has different requirements and alternatives for student loan borrowers. Read on to see which one will work best for you:
SoFi is a non-traditional lender that uses a novel underwriting process. Their approach focuses on only lending to financially responsible borrowers, and they analyze “forward-looking” factors to determine each applicant’s future potential and ability to pay. For instance, as of early 2016, SoFi no longer uses FICO credit score in underwriting, but instead takes employment history and other factors into consideration.
SoFi offers borrowers competitive rates, as well as other services such as unemployment protection, career counseling, and startup mentoring. You must borrow a minimum of $5,000.
Loan Repayment Terms: 5, 10, 15, and 20 years
Rates: Variable as low as 2.39% and fixed as low as 3.5%
Pros: Unemployment protection, career counseling, startup mentor, 0.25% savings if you pay through AutoPay.
Cons: SoFi’s underwriting process makes it more difficult for borrowers to qualify, meaning you are less likely to be approved with SoFi compared to other private lenders.
This peer-to-peer style platform offers refinancing for graduate and undergraduate students for graduates of over 2,000 universities. According to CommonBond’s promotional literature, borrowers save over $14,000 over the life of the loan by refinancing with them.
The product that really makes CommonBond stand out is their “hybrid” loan. This is a loan that carries an initial fixed rate that switches to a variable rate after a set period. For borrowers who anticipate paying off their loan quickly, the hybrid loan can be a major money-saving option.
In addition, CommonBond offers high-touch customer service, and a community of students, graduates, and alumni, which allows for networking. CommonBond also offers CommonBridge, a service matching out-of-work borrowers with consulting opportunities until they find a new job, as well as financial hardship forbearance.
Finally, CommonBond offers something they call their Social Promise: for every degree that is fully funded through their platform, they fund the tuition of a student in need through Pencils of Promise.
Loan Repayment Terms: 5, 10, 15, and 20 years
Rates: Variable as low as 2.13%, fixed as low as 3.5%, and hybrid as low as 3.79%
Pros: Financial hardship forbearance, networking opportunities, consulting service for borrowers between jobs, Social Promise, 0.25% savings if you pay through AutoPay
Cons: The list of eligible schools may not include your alma mater.
Upstart is geared toward recent and upcoming college graduates, so it evaluates your potential based on factors that include what college you attended, your GPA, and even your SAT scores. This means borrowers who have not had the time to build a credit history can use their academic history and other proof of financial responsibility to qualify for a refinance. However, if you do have a credit score, it must be at least 640 in order for you to be eligible for an Upstart loan.
Upstart is a peer-to-peer lending platform that connects borrowers with accredited investors who fund their loans. The platform charges an origination fee that varies based upon the borrower’s history and underwriting. In addition, all loans are for a term of three years, and there is a minimum of $3,000 and a maximum of $35,000 on loans.
Loan Repayment Terms: 3 years
Rates: 4.67% – 29.99% APR
Fees: Origination fee between 1% and 6%. This fee is rolled into your APR.
Pros: Young adults who have not built up a credit history can qualify for refinancing with Upstart.
Cons: The loan term is relatively short, and the maximum amount to borrow is relatively low, making this a poor choice for a graduate with a lot of student debt. In addition, because of the unusual underwriting, qualifying for an Upstart loan may take longer than it would with other lenders.
Like Upstart, Earnest is a lender created for individuals without a long credit history. Instead of focusing on credit scores, Earnest looks other markers of financial responsibility, such as employment history and salary, savings, income-to-expense ratio, and retirement savings. Earnest analyzes more than 80,000 data points for each prospective borrower, which means you must be comfortable giving the lender permission to scan your bank account.
Earnest is also committed to offering flexibility for its borrowers. Unlike any other lender, Earnest allows clients to choose their exact term, rather than just from a set year range, which can lead to significant savings. Once you have been approved for a loan, you can easily alter your monthly payment amount or payment schedule. There are no late fees if you miss a payment. Instead, Earnests’ Client Happiness team will work with you to avoid default by adjusting terms or setting up payment plans. You can refinance an existing student loan starting at $5,000.
Loan Repayment Terms: 5 years to 20 years
Rates: 2.15% – 5.8% variable and 3.50% – 7.45% fixed
Pros: Student loan borrowers who otherwise try to avoid debt can get a much better APR with Earnest than they could with a traditional refinanced loan. The flexibility can be a boon to any responsible borrower with a non-traditional job or irregular income.
Cons: You must be willing to offer Earnest a very intimate look at your finances to qualify.
The following tools offer a marketplace for student loan options. The benefits of using a marketplace is that you can quickly compare real offers from multiple lenders, they have the widest eligibility criteria and you can compare rates before finishing the application process. A marketplace also compares a wide range of financial histories with some lenders accepting lower credit scores with a co-signer.
Credible offers a marketplace of student lenders for borrowers looking to refinance. Credible’s unique dashboard allows for side-by-side comparison of refinanced loans, which you can then sort by and compare by APR, monthly payment, or total repayment amount.
Borrowers must have more than $7,500 in federal or private student loans that are not currently in forbearance or deferment. Borrowers with a credit score lower than 680 will likely require a co-signer. Credible’s site lets you know immediately if the interest rate offered to you is competitive, which will help you determine if you are a good candidate for refinancing.
Pros: Credible’s dashboard does an excellent job of helping you sort and compare each offer.
Cons: Credible works with a larger group of lenders, but not all are represented. That said, their platform contains a wide range of rates and products available so users will have an opportunity to find a loan which is right for them.
Like Credible, LendEDU is a student lending marketplace which allows private student lenders compete for borrowers’ business. Signing up with LendEDU allows you to compare rates for refinancing your student loan with up to 9 different lenders. This gives you a one-stop-shop when you decide to refinance. By using LendEDU, borrowers only need to enter a single lender application, and there are no hard credit pulls—so shopping around via LendEDU does not affect your credit.
LendEDU has no fees whatsoever, and offers many different video courses and guides to help borrowers make the best decisions for their money.
Pros: Educational video courses and guides offered for free.
Cons: As of now, LendEDU works with a relatively small group of lenders. Also, you may end up having to resubmit the same information over again to the lender once you have chosen one.