[Update:Although I didn’t have a financial relationship with either of these companies when this article was written, I do now. DRB has paid me for advertising and I have an affiliate agreement with SoFi (meaning if you actually refinance with them through one of the links on this page I get paid.)]
One of the things I feel the worst about for current students, residents, and new attendings is that not only do they have a much higher amount of student loan debt, but they are paying a ridiculously high amount on it. Federal loans were, until recently, offered at a minimum of 6.8%, with many students now having a majority of their debt at 7.9%! I find it completely unfair that I can get a mortgage for less than the rate of inflation, and dump it in the case of bankruptcy, but you can’t get student loans from the government for twice that AND they can’t be discharged in bankruptcy. Thankfully, Congress and the President have provided a little bit of relief with a bill this summer that tied interest rates to treasury rates. So now, instead of 6.8%, you’re paying 3.6% plus the 10 year treasury rate at the time the loan is made (with a cap at 9.5%), which is currently a total of 5.41%. Direct PLUS loans are down from 7.9% to 6.41% (4.6% plus the 10 year treasury rate.)
Student Loan Refinancing Issues
Perhaps the biggest difference between coming out of school a decade ago like me and coming out now, however, is the issue with refinancing. My classmates refinanced their student loans at rates as low as 0.9% after graduation in 2003. That’s about as close to free money as you’ll ever get. Now, if you want to refinance your government loans, they simply take an average of all your loan rates. It’s nice to consolidate I suppose, but it doesn’t save you any interest….until now.
New Student Loan Refinancing Options
There are currently two options available (and hopefully many more to come) where students can actually refinance their student loans at a lower interest rate. The first of these is a company called Social Finance (SoFi).
This is actually a peer to peer lending company, not that dissimilar from Lending Club or Prosper. They are currently loaning money to students who graduated from or are currently attending 100 schools, including my undergraduate institution and my medical school. The reason there are only 100 schools is that they require either alumni or institutional support for a school before they will loan there. Currently, they have only lent money to 1900 students, but I’m sure that number will grow. Rates range from 4.99%-6.99% fixed (with a 0.25% discount for autopayment), or 2.94-5.19% (capped at 8.25%) variable, again with a discount for auto payment.
I think this is a great option for a borrower. You get lower rates than you get from the government. It’s beyond me why an investor would be interested. When I go shopping for peer to peer lending investments, I expect a double-digit return, and there’s no way to get that when your yields are under 7%, especially if there are some defaults.
Darien Rowayton Bank (DRB)
I was approached recently by another option, the Darien Rowayton Bank (DRB), who sponsored last month’s newsletter (although I received no compensation for mentioning them in this post–feel free to call them and tell them to buy a banner ad on the site). [Update: DRB has now purchased a banner ad that’ll run during November.] They’ll refinance your loans from any institution. These two companies have also been in a bit of a rate war as of late, and DRB has fixed rates of 4.75-5.75% and variable rates currently set at 2.76-3.01%. That looks awfully attractive compared to the 7.9% the government is giving you. As of this posting, DRB’s rates are at least 0.25% less than what you can get from SOFI (assuming you went to an institution where your loans quality with SOFI). DRB also likes to point out that they have a single rate for each term (5-15 years) whereas you have to go through the SOFI application process before you can actually find out your exact rate. The biggest benefit of using DRB over SOFI (aside from the lower rate) is that you didn’t have to attend a SOFI-approved institution.
Reasons Not To Refinance Student Loans
Remember that when you refinance your loans, they are no longer eligible for the IBR or the PSLF program, and that like other student loans, SoFi and DRB loans don’t go away in bankruptcy. You also probably don’t want to refinance subsidized loans from undergraduate, if you have any, since that subsidization will go away. Since undergraduate loans are generally at a much lower rate anyway, that’s not really an issue.
The Mortgage Option
My favorite student loan refinancing option involves a mortgage. If you can somehow turn a high-interest, non-dischargeable in bankruptcy, non-deductible (for most docs) student loan into a low-interest, dischargeable, deductible mortgage or home equity loan, that’s a great deal. Unfortunately, those who have big fat student loans don’t generally have any home equity, and by the time you get some, the student loan situation isn’t so bad.
I hope to see more competition in this financial marketplace, but it’s possible that both of these companies will just go away. Neither of them is exactly a household name. You might want to jump on one of these options before it’s too late. It isn’t like you can’t refinance again later.
10/27/16 Update: Clearly neither of these companies went away and many more have joined the refinance business. If you do decide to refinance some or all of your loans, I would appreciate it if you would use the links on the site. It is a significant source of revenue for us and I have negotiated a special deal with many of the companies for you that you cannot get by going to them directly. And yes, you can refinance multiple times at increasingly better rates as your financial situation improves. There is no “break-even period” since there is no cost to you to refinance.
Best Student Loan Refinancing Companies
Fixed 3.75% - 7.03%
Fixed 3.89% - 7.89%
Fixed 5.23% - 8.97%
Fixed 5.10% - 8.93%
Fixed 3.39% - 6.69%
Fixed 3.899% to 7.979%
Fixed 3.20% - 6.25%