Industry News

3 Myths and a Truth About Refinancing Student Loans

June 10, 2015

https://www.linkedin.com/pulse/3-myths-truth-refinancing-student-loans-daniel-macklin

Student loans play an increasingly prominent role in people’s financial pictures, and yet there’s a startling amount of outdated and false information out there about them. Case in point: student loan refinancing, which has grown in popularity over the past few years. And like any modern financial concept, the amount of misinformation about student loan refinancing has grown with it.

Want to dispose of your student loan debt as efficiently and cost-effectively as possible? You can start by separating fact from fiction. Let’s review some of the big student loan refinancing myths that I’ve read or heard recently, in the hopes that demystifying them can help you make a more informed decision about your own financial situation.

MYTH #1: You shouldn’t refinance federal student loans.

The growth of student loan refinancing has understandably attracted a lot of attention, and some of that attention has been from those that fear borrowers may not understand what they’re giving up when they refinance federal loans.

When you refinance federal loans with a private lender, you lose the government-backed protections associated with those loans – things like potential loan forgiveness, deferment and forbearance options, and extended and income-driven repayment plans.

The Consumer Finance Protection Bureau (CFPB) has said the loss of these protections should be transparent to a borrower who is looking to refinance federal loans – and I wholeheartedly agree. At SoFi, we’re very upfront about the fact that we don’t offer most of these protections (although we do provide forbearance under certain circumstances – more on that in a minute). Our view is that if you expect to use these protections at some point, you’re probably better off keeping your federal loans where they are. We’d be doing our members and our business a disservice if we tried to convince anyone otherwise.

But clearly, many of our members choose to refinance their federal loans anyway. Why? Because they don’t plan to use these protections, and their priority is saving money. Many of them are refinancing high interest rate federal loans from graduate or professional degrees, and the savings they can get from lowering that rate is significant (our average member saves almost $12,000). Essentially, they can either pay a “premium” for the protections associated with their federal loans, or they can forgo the protections and save money through refinancing.

So should you refinance federal student loans? The answer is a resounding “it depends.” Just make sure the lender you’re working with is transparent about the realities of losing those government benefits.

MYTH #2: Private loans don’t offer benefits or protections.

Of course, the ultimate concern about federal student loan refinancing is that when borrowers lose those government protections, they’re at a greater risk of defaulting. But while it’s true that most private lenders don’t offer things like income-driven repayment plans, it doesn’t mean borrowers aren’t being set up for success.

For example, at SoFi, we offer forbearance for members who lose their jobs, but we go a step further with one-on-one job search assistance. Not only have we helped more than 70 of our members find new positions that they love, we also work with members on an ongoing basis to help them progress in their careers. In our view, suspending payments is just a band-aid, but by helping our members keep their income on track, we’re actually doing more to prevent defaults than with forbearance alone.

MYTH #3: Private loans are dangerous because they offer variable interest rates.

Another concern I’ve heard is about the fact that borrowers have the ability to refinance out of fixed rate federal loans into variable rate private loans. As a recent Financial Times article noted, about half of private loans have a variable rate, a stat that concerns the CFPB’s student loan ombudsman Rohit Chopra because “if interest rates rise or if the borrower hits a rough patch, the new loan may have no options to prevent a default.”

We completely agree that borrowers should be aware of the considerations involved in taking out a variable rate loan – which is why we’ve written more than one blog post on the subject. We’re very clear about the fact that variable rate loans, which provide a lower interest rate than their fixed loan counterparts, are only appropriate for borrowers who are reasonably certain they can pay them off within a short timeframe. We also cap our variable rate loans at 9.99%, which significantly reduces the risk to our members.

TRUTH: Student loan refinancing can offer big benefits for some borrowers.

Student loan refinancing isn’t right for everyone, but for some people it’s a no-brainer. And it’s not just about saving money. We’ve heard from countless members who feel grateful they can finally move forward with big life plans like getting married, having children and buying homes – all because they’ve reduced their debt load through refinancing.

Which is what informed financial decision-making is all about.

Dan Macklin is one of the founding members of SoFi, a leading marketplace lender that offers student loan refinancing, mortgages, mortgage refinancing and personal loans. SoFi’s non-traditional underwriting approach gives early stage professionals better access to competitive rates, greater financing and different products than can be found with traditional lenders.

Dan is a thought leader whose perspectives on education debt and personal finance have been featured in a variety of media outlets, where he covers topics that help young professionals make smart financial decisions.