Managing Your Money

You Will Refinance a Mortgage, Why Not Student Loans?


The Problem
According to US News, roughly 70% of 2013 college graduates left campus with an average of $28,400 in debt. The amount is significantly higher if you returned for a graduate degree. Time reports that Federal interest rates on post-grad loans were about 50% higher than on under-grad loans, and that graduate students borrow three times the amount of their undergraduate counterparts annually - a fact which is scary considering that graduate debt makes up 40% of all student loan debt, even though grad students are only 14% of the student population.

Nowhere to Turn
For many, options seem limited. Let’s face it – they are. With varied interest rates from multiple loans and no definitive government plan of action, loan consolidation and just waiting may seem like the only two, albeit poor, options. But depending on your specific situation, there might be some valuable refinancing options you just didn’t know about.

Attractive Alternatives
There are a number of companies who specialize in helping borrowers refinance student loans; two examples are DRB and SoFi. For low-risk borrowers meeting the eligibility requirements, the savings can be substantial…if you can afford it. For example, a refinance might shave ~1% off your rate in exchange for dropping from a 25-year repayment schedule to a 15-year. Obviously your monthly payments would increase, but over the course of the loan, you would save tens of thousands.

Evaluate the Big Picture
When making the decision to refinance, there are important factors to consider other than just lowering your interest rate. If the loan term has changed, first calculate whether you can afford the new payments. Also, choosing to refinance with a private company forces you to surrender certain benefits, such as income based repayment, public service loan forgiveness and deferment. There is no one-size-fits-all approach to refinancing, so be sure to do your homework and evaluate the best option for your situation.

Other Considerations
Another factor is whether to select a variable or fixed interest rate. Everyone has a different risk tolerance, so it is important to fully understand how your payments will change as interest rates do. Inquire about prepayment and refinancing options. Will you get a prepayment penalty? If interest rates drop, or you get a big raise, are you able to refinance for free? Life circumstances change so it’s wise to know how much flexibility you will be allowed. If you have multiple loans, analyze the interest rates and balances on each.

Finally, evaluate the decision to refinance in conjunction with your other financial goals. For example, if the top priority is saving up for a down payment on a condo in the next couple of years, it might not be best to refinance with a shorter repayment period, as it is possible you’ll be locking in a higher monthly payment. Instead, consider prepaying a smaller amount on your current loan, which will reduce your overall interest expense and provide added flexibility.

Fortunately, there are options to break free from student loan jail which Time has summed up nicely. It is worth taking the time to evaluate your situation and see where there might be room for improvement.

Financial Planning Association of Massachusetts member Kristin McFarland is the Director of Strategic Partnerships with The Darrow Company in Boston. The Darrow Company is a fee-only asset management and financial advisory firm focused on building and preserving the wealth for their diverse client base.

Kristin McFarland is an investment adviser representative of The Darrow Company, Inc., an SEC registered investment adviser located in Massachusetts. The material contained in this article is for general information only and should not be construed as the rendering of personalized investment, legal, accounting, or tax advice.

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