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Why Now Might Be the Best Time to Refinance Your Student Loans

Sep 23, 2015

With an MBA and a law degree from the University of Pennsylvania, Ama Karikari-Yawson had the sort of six-figure graduate school debt that student loan nightmares are made of.

Her loan payments were about $2,000 a month. Coupled with roughly $4,000 in childcare costs for her two kids, she had little left over at the end of the month, even with her cushy New York City corporate lawyer’s salary.

“I really felt like I was working to work,” says Karikari-Yawson. “All the money I was making, I hardly saved anything.”

When Karikari-Yawson’s husband saw an ad on the train for a student loan refinancing company, the couple was intrigued, and she started researching.

Some of the interest rates on Karikari-Yawson’s private loans were lower than what CommonBond, the refinancing company she ultimately chose, offered. But by refinancing her federal loans, about half of her total debt, she was able to chop $800 off her monthly payments in exchange for a longer loan term.

Last month, she quit her job as a lawyer and started working full-time on what was her side project as a children's author and speaker.

Karikari was eligible for CommonBond's services because of her graduate school debt. But this week, the lending company announced a giant expansion: Instead of focusing on graduate debt from just 200 institutions, it will now refinance undergraduate or graduate debt from more than 2,000 colleges. CommonBond will also refinance Parent PLUS loan debt.

The news is the latest evidence of a rapidly growing student loan refinance market. And Karikari-Yawson’s story is precisely the type that student loan refinancers hope its desired customers will identify with: someone with a comfortable salary but high monthly loan payments that have become a burden.

CommonBond launched in 2012 by offering loans to MBA students at the University of Pennsylvania’s Wharton School of Business, the alma mater of its founders, before slowly expanding to more colleges. So far, the company has refinanced the loans of 2,500 borrowers and is one track to pass $500 million in loans by the end of this year.

Behind the Boom

In all, five of the biggest refinancing companies—SoFi, Citizens Bank, CommonBond, Darien Rowayton Bank, and Earnest—have together refinanced more than $5 billion since 2012, the Wall Street Journal reports.

In the past year, eight new refinancing lenders joined Overture Technologies’ Student Loan Marketplace, a tool to compare loan terms from multiple lenders.

Interest rates on the market range from 3.5% to 8.24% for fixed rates and 1.9% to 8.98% for variable rates, according to Kim Thompson, vice president of product development at Overture.

Federal student loan interest rates are set by Congress. As of July 1, they’re 4.29% for undergraduate loans, and 5.84% or 6.84% for graduate and parent loans. Older federal loans have interest rates that top 8%.

That one-size-fits-all approach, in which all borrowers get the same rate, creates a window for new players, according to a report from Goldman Sachs Group. It estimates that nearly $150 billion in federal loans would be eligible for refinancing based on the credit score of the borrowers.

CommonBond CEO David Klein says borrowers save an average of $14,000 on their debt. SoFi cites similar savings figures. And Citizens Bank boasts average savings of $145 a month and an average reduction of 1.5 percentage points on interest rates.

The companies also advertise quick decisions and promise stellar customer service at a time when some federal loan servicers are starting to rack up complaints. CommonBond, for example, says it will give clients an idea of the rate they qualify for in about five minutes.

Risks for Borrowers and the Rest of Us

But there are caveats. For one, not everyone is eligible. A FICO credit score in the high 600s is a bare minimum, and each company has income requirements. More importantly, the savings you may get from refinancing comes at the cost of losing federal loan protections. (For more advice on whether you should refinance, read these three questions to ask before refinancing student loans.)

Plus, some experts have raised concerns about the big-picture effects of student loan refinancing. The most credit-worthy borrowers are being taken out of the federal government’s portfolio, leaving behind low earners and people who are more likely to have trouble paying off their loans.

But Brendan Coughlin, president of consumer lending banking at Citizens Bank, says the emergence of more options for borrowers improves the overall student lending market. Since launching its program last year through the second quarter of this year, Citizens Bank has accrued more than $875 million in refinanced student loans.

It’s common for borrowers to be able to refinance other major types of debt, but student loans have been an exception. “It’s actually the one product that lends itself most to restructuring so you can get a better deal,”Coughlin says.

Looking for more information on financing college or refinancing debts? Check out the MONEY College Planner's tools and advice.

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