Refinancing a Student Loan

The Shocking Truth about Refinancing a Student Loan

Refinancing a student loanRefinancing a student loan makes sense to us, but to the government who administers the loan program, it apparently doesn’t.  Do you think that it has anything to do with the estimated profit of 51 BILLION dollars that the Education Department will make on student loans to students and parents this year?

Nah, they wouldn’t do that, would they? Does it matter also that student loan delinquencies are at an all time high? Many of these loans can’t be repaid because graduating college students can’t find a job due to the horrible economic conditions that still exist in many industries and states.

I realize that many of these same students have created this problem by choosing an educational path that they simply could never afford. By choosing a less expensive college as an example, or heaven forbid, attending a community college could have saved a lot of money. Working a part time job and paying as you go would save a lot as well.

Be that as it may, the issue at hand is that student loans outstanding have passed the one TRILLION dollar mark, and defaults are increasing. Another fact that most individuals are not aware of is that filing for bankruptcy will not discharge a student loan. If that bubble bursts, it will be as bad as the real estate and mortgage bubble of several years ago.

We all see the ads to refinance a mortgage at rates so low they are hard to believe. Yet, refinancing a student loan carries a rate that is more than twice that amount and will hurt the economy. There is a bill before Congress sponsored by Senator Kirsten Gillibrand (D-N.Y.), that would require the Education Department Secretary to refinance a student loan automatically to a fixed rate loan of 4%. You can only imagine the reaction in the White House to this bill.

There is a government agency, The Consumer Financial Protection Bureau (CFPB), who issued a report outlining how high student loan debt has a negative impact on our economy. Some of the areas impacted were home ownership, formation of new businesses, inability of workers to save for retirement, and a labor shortage in some occupations that paid lower wages.

The fact that the option for refinancing a student loan wasn’t available to these borrowers was noted as a primary reason for the bad effect on the economy. Because most student loans are marketed through the colleges directly, it becomes very difficult for a borrower to get access to information on refinancing a student loan after they graduate and are no longer on campus.

Many, if not most students, have more than one student loan outstanding, and usually from different sources. This makes it difficult in determining the total indebtedness, or even if a possibility exists for refinancing a student loan. The situation becomes even more problematic when you realize the savings that could be generated if refinancing were more readably available.

Private loans that are made by banks normally carry a higher rate of interest than others that have a federal loan guarantee. When these loans are granted, the student normally has little if any credit history, and the repayment terms have no assured future earnings to service the debt.

However, after the student graduates and finds a job, their financial resources increase and they develop some credit history, making the risk substantially less. At this time, it would behoove the private lenders to lower the rate of interest as a reward for reduced risk.

This rarely happens, though, and student loan borrowers have no options to reduce the amount of their payments because there is no competitive, active market to refinance a student loan.

There is a possible solution, the CFPB believes, and that is to tap one of the government agency funding sources, or to get the Federal Financing Bank involved. They could be structured to make capital more readably available to the student loan lenders. In essence, they would operate similar to the mortgage agencies.

State and municipal sources could also assist with tax exempt funding. However, more control would have to be exercised by the regulators to keep the refinancing market in check so that it didn’t inflate this bubble any more than necessary.

Unfortunately, it seems that banks quickly forget lessons that they should have learned from past mistakes. When Fannie Mae and Freddie Mac were trying to assist the housing market a few years ago, many banks were only concerned with fees and other income and paid little attention, if any, to credit quality or overall credit worthiness. In my opinion, they would do the same without very stringent oversight.

At the present time, refinancing a student loan can be done, but the borrower has to be careful in the case of a federal obligation. Under a federal loan, there are provisions for loan forgiveness as well as deferment, for certain types of student loans. If the debt(s) are refinanced privately, those options disappear.

The primary advantage and attraction to refinancing a student loan is the opportunity to lower the monthly payment. However, many lenders do this by giving the borrower a longer time to repay the debt instead of reducing the interest rate. This increases the overall cost of the loan because the borrower is paying more interest, and more than likely, repaying the loan until they are practically ready to retire.

There are a number of ways this problem can be alleviated. Those students that are preparing to enter college need to take off the rose colored glasses and prepare a budget to determine their needs. Not every student needs to attend one of the Ivy League schools. Many can enroll in community colleges without the need to borrow and then transfer to a college that they will be able to afford. Others will be able to work part time while in school to cover part of the expense.

Another important way is for the Department of Education to fix the interest rate at a low figure to help keep delinquencies down. More importantly, prospective college students need to have required in depth counseling in the area of budgeting and student loan borrowing. Perhaps if all of that can be done, then refinancing a student loan would not be an issue for discussion.

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28 responses to “Refinancing a Student Loan”

  1. Avatar Amanda says:

    I feel like the world of student loans can be daunting and VERY confusing. I graduated from college in 2008 and have been tackling Sallie Mae ever since. I have not refinanced my loans because no document seemed to clarify things until now. But I appreciate the article. It kind of clears up the muss and now I think I’m ready to take on my debt. Let’s pay it off, baby!

  2. Avatar Jacob says:

    I’ve been confused on the whole student loan/refinancing process. The article certainly helped clear the air, so when I sit down with a loan expert… I can tackle my finances in FULL!. Phew!! Stress city.

  3. Avatar Vivenne says:

    I went to community college for my core classes, just to offset the many expenses in college. One semester, I was taking 21 credits which is beyond excessive… but it worked beautifully. 3 degrees in 5 years.

  4. I really don’t know what is a “STUDENT LOAN” until I read this. It gives in depth information and I have never read any article more comperehensive than this. Thanks for this valuable knowledge.Keep it up!

  5. The key is not to get into a lot of loans in the first place! My daughter was able to land a good scholarship through FindScholarshipMoney.com but otherwise she would have been going to a state school. The worst thing you can do is take out a lot of loans when you’re just starting out. Avoid the debt!

    • So many students feel that they have to attend the Ivy League schools and instead should be looking at schools that they can afford. They get into debt, and when they graduate, have a heavy burden to bear for many, many years.

  6. Avatar Jessica says:

    Unfortunately I’m one of those people with an outstanding student loan. I was already at a low cost college but was short a few thousand dollars there for the last term and had to take out a loan. I had a job after college but the economy dumped and I lost it to other more experienced people and now my loan sits unpaid and gathering interest. I did work several part time jobs in college, and I wish now that I had used some of that money each month to put towards my student loan instead of other bills. I did read an article about a guy that graduated college debt free, because he paid back his student loans each month with his part time jobs. Wish I had done that.

    Great article, thanks!

    • Avatar Dinah Urasitz says:

      I’m sorry to hear that, Jessica. I hope things will start looking up for you, and thanks for the warning to pay back student debts monthly. It’s much appreciated!

  7. Avatar Ann says:

    I like how you suggested to fix the problem before it even STARTS, by choosing a cheaper university or holding down a part-time job. That right there PREVENTS the whole mess! Glad I’m long done with my college years lol. My thoughts go out to all the struggling students below!

    • Thanks for your comment Ann, we appreciate it. There are a lot of students, for whatever reason, delinquent on their student loans. Our “highly concerned” lawmakers were asked to reduce the interest rate on these loans in light of the overall reduction in interest rates, and they did their usual wheel spinning. Now they left town for the holiday.

  8. Avatar Lorenzo says:

    Planning ahead can drive down the overall cost of college. If college courses are available during your senior year of high school, then you should look into taking as many of those courses as possible. There is also Advanced placement exams. Most colleges will provide you credit towards college courses as long as you score over a certain amount.

  9. Avatar moumirza34 says:

    Actually I am also think its more positive news for the real estate market. I think it make a biggest change in real estate field. Thank you for this posting. Keep it up.

  10. I think the solution to this problem is already clear for it boldly stated here and other blogs. The only that we are waiting is the implementation of people in charge.

  11. Avatar Donatus says:

    I don’t know what is student loan, but after reading this article, i now have a clear definition and what its all about. Thanks for sharing

  12. I’ve really got to start researching this soon. I’m currently doing IBR on nearly $130,000. I’m paying very aggressively right now, but my fear is that the minimum payments would stay unbearably high if I ever lost my job. Any thoughts on whether they have income-based repayment refinancing options?

    Also, are they still considered “student loans” for credit and legal purposes after refinancing? That is, do they still stay with you after bankruptcy (but disappear at death) and do they not affect your credit score unless you miss a payment?

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  14. Avatar Chuck Stone says:

    I am more a mortgage refinance loan expert, but there are ways to refinance a student loan in the same manner as many lending institutions today are diversified – as long as it’s a loan, they can rework it given your credit is up to par.

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    I’m interested to be your guest poster.

  17. Good article with some good points. Refinancing your student loan can be a great help if you know what you are doing, but someone will always be winning and someone will be losing.

  18. Avatar Tariqul says:

    Refinancing student loans a great way but it always not work properly because of Governments policy as well as loan providers. I think refinancing should be more broad because it has a great opportunity to properly help those people who require this. By the way thanks for your informative sharing.

  19. Avatar Spencer says:

    Thank you for posting this. I like how you gave tips on how to prevent huge loan problems after college. Especially community college. It is way cheaper than going to a university, especially if you want to go to one out of your area.

    • So many individuals today think that they have to attend one of the IVY League schools to get a good education, and that simply isn’t true. The big name schools do a great job, but there are so many smaller schools that may specialize in a certain field of study that will help you more. Cheaper as well, & a good community college for the first two years can save a lot of money.

  20. Avatar Andy says:

    Thanks for letting us know about this weird issue of a student loan and I’ve understood the entire issue very clearly and I hope when I will go for taking students loan I will able to handle the entire things easily. Thanks

  21. Avatar Jonah says:

    I thing government student loans are the worst type of debt you can possibly get into (not counting loan sharks…although that’s also debatable :)).

  22. Avatar Hugo says:

    Thanks for writing such an informative blog. I have already taken a student Loan for a Graduate course. It was not easy to take loan and full-fill necessary requirements of bank but I have done this with the help of my elder brother. Now after completing I’ve joined job and after few months I’ll return amount to the bank.

  23. Avatar George says:

    Hi Gust,

    First off, thanks for this awesome post! I really enjoy reading it.

    A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in school. It also differs in many countries in the strict laws regulating renegotiating and bankruptcy.

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