NEW YORK (MainStreet) — Three years after graduating from Emory University’s law school, Sara Hamilton had accumulated more than $100,000 in undergraduate and graduate student debt and refinanced nearly two-thirds of her loans.
Refinancing her loans not only lowered her monthly payments by $61.70 to pay $748.15 per month, but she was also able to shorten the length of her loans from 25 years to 15 years through Darien Rowayton Bank (DRB), a Darien, Conn. bank that focuses on refinancing student loans.
“I do not regret my decision at all,” she said. “I actually sleep better at night knowing that I am paying what I believe is a fairer interest rate in the marketplace.”
Refinancing student loans or seeking other options to delay payments is becoming more commonplace as the amount students are borrowing to pay for their four-year undergraduate college degrees is rising across all income levels, increasing their debt burden before they have even landed a job. The current low interest rates are also an advantage for graduates considering refinancing.
“Those who have variable interest rate student loans may want to take advantage of current low fixed interest rates and refinance under those terms to avoid potentially having to make higher monthly payments down the road,” said John Rasmussen, president of Wells Fargo’s Education Financial Services in St. Paul, Minn.
A 2014 analysis conducted by the Pew Research Center showed that from 1992 to 2011 and across all four income groups - low income, lower middle, upper middle and high income - college students are borrowing more money. The standard amount of cumulative student debt for their undergraduate degree increased from $12,434 for the class of 1992-93 to $26,885 for the class of 2011-12 (figures adjusted for inflation).
By 2012, “a record share of the nation’s new college graduates or 69%” had used student loans to finance their degrees and the “typical amount they had borrowed was more than twice that of college graduates 20 years ago,” the report said.
In the fourth quarter of 2014, student loan debt rose by $31 billion with a total of $1.16 trillion for 2014, according to the Federal Reserve Bank of New York.
“Although we’ve seen an overall improvement in delinquency rates since the Great Recession, the increasing trend in student loan balances and delinquencies is concerning,” said Donghoon Lee, research officer at the Federal Reserve Bank of New York. “Student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households.”
While Hamilton, who is now 29 and practices litigation at a firm in Atlanta, is earning a healthy salary, the amount of interest she was paying on her loans was extremely high. The interest rates for her law school federal loans varied from 6.8% to 8.5%. Her new interest rate is 5.5%.
“The bank had the lowest rates of any bank I looked at,” she said. “After asking around and comparing rates, I ultimately chose them because they were responsive and did not charge any fees. In my case, refinancing was a no brainer.”
Federal Loans and Refinancing
If you obtained a federal loan to pay for your degree, the government only offers consolidation as an option. You cannot refinance your federal loans with the government; however, you can use a private lender.
Consolidation means you are allowed to combine one or more federal student loans from the U.S. Department of Education into one new loan. While you only make one payment each month, the amount of time you have to repay your loan will be extended.
The drawback in consolidating your loans is that the interest rate is the weighted average of all loans. It can even backfire because borrowers can't target specific loan groups for overpayment, said Hamilton.
Two bills were introduced by senators recently and would have approved the Department of Education to refinance federal loans, but did not garner any support.
Private Loans and Refinancing
Refinancing student loans can be affordable since some banks do not charge any fees. Not only can you lower your monthly payments and interest rate, it can help some consumers pay off the loans early, said Rasmussen.
Before you refinance your loans, consider temporary options such as deferment and forbearance which allow you to delay making payments if you are unemployed, do not earn a steady income or cannot afford your debt burden. Of course, you are still accumulating interest. Look for loans that do not charge a fee for early repayment.
“It’s also helpful to know how the new refinancing terms will change the total interest paid for the life of the loan and compare that amount to the original loan,” Rasmussen said. “Students and co-signers shouldn’t undervalue the option of finding a lower interest rate, an extension of loan term, or a combination of both.”
Another factor when graduates are searching for a lender is to keep in mind is that not all banks will refinance student loans or ones in larger amounts.
“At first, I went to some major banks and was declined, because they understandably do not refinance unsecured loans, especially in the amount I had,” Hamilton said.
Lenders also give borrowers options for how long they want to pay loans. Some banks such as DRB have various options, including 5-, 10-, 15- or 20-year loan terms. With students averaging $50,000 in student loans at interest rates of 7% to 8%, many people can refinance to 4.5% on a 10-year loan, which means they are saving $7,000, said Jenny Chou, chief marketing officer at DRB.
“Now consumers can choose from more providers,” she said. “All student loans with DRB have no origination fees or prepayment penalties.”
While interest rates to refinance loans have not moved much since 2013, now is a good time to lock in lower rates before the Federal Reserve increases them later in the year, Chou said.
“Shop around and don’t be distracted by extra bells and whistles,” she said. “What will ultimately save you money will be that rate.”
--Written by Ellen Chang for MainStreet