Every year, student loans help millions of
people from all socioeconomic backgrounds attend higher education institutions,
despite a seemingly unaffordable price tag. After graduation, though, they’re faced
with the often-harsh realities of repayment.
That’s when they should remember one crucial
word in the loan lexicon: refinancing.
It’s an important one, especially for borrowers looking to shorten their loan
repayment period and take control of their financial futures.
Refinancing involves taking your old,
expensive loans and replacing them with a new one (with either a lower monthly
payment or a shorter term). It’s the simplest and fastest way to meaningfully shrink
student loan debt.
In fact, the option to refinance is available
for more than 20 million people, a large population of borrowers who could take
advantage of it through a few quick steps. But, how can young borrowers
actually make refinancing as effective as possible for them?
You don’t have to be a financial mastermind to
put maximize what you get from refinancing. Here’s how one recent grad, Amy,
went about refinancing her student loans—and how you can, too.
In the excitement of college acceptance
letters and graduation preparation, all of the paperwork, registration forms,
and applications for student loans can overload a student’s senses. It might
not fully sink in at the time, but the financial commitments students accept at
age 18 can follow them for years after college.
Meet Amy. She’s a straight-A student headed to
her top choice college. She’s elated, except for a case of sticker shock.
Tuition is far more than Amy and her parents
expected. She can’t cover the cost of attending solely with her parents’
personal savings or the money in their 529 college savings plan.
She’s using financial aid and rounding out the
rest with federal and private student loans to foot the $47,000 annual bill of
her private, four-year college. To do so, Amy needs to borrow $20,000 a year.
Of that total, $5,500 will come from the
government. That’s the maximum amount she can take out in federal loans during
her first undergraduate year. On those, she’ll pay the 5.05 percent APR (annual
percentage interest rate) set by the government on loans it issues.
She’s getting the remaining $14,500 in private
loans from a bank. The bank charges a much higher APR—9.66 percent—because they
are lending a higher sum to a borrower with little to no credit history. That
means they are taking on more risk in the agreement.
The difference between normal interest rates
and APR is that APR accounts for the interest rate plus any other costs or fees
involved in obtaining the loan. That’s why APR rates can seem exceptionally
Amy plans to graduate on time with a computer
science degree and go right into the job market as a software developer.
Currently, she’s focused on prepping to start school.
Amy will worry about paying back her loans
after graduation in four years, following that promised six-month grace period
that, right now, seems very far off. She is hardly alone—about 70 percent of
students graduate college with student loan debt, then must find a way to
For these recent grads, the principal plus
interest can be shocking, and more money than they can pay back. That number
can grow over time, too, if interest rates rise due to market fluctuation or
new government legislation.
Borrowers can feel like they’re making little-to-no
progress years into their repayment period with few ways to fix the financial
damage being done. However, they
have an option.
In the past few years, companies have emerged
to help millions of borrowers get lower interest rates and pay down their
student loan debt faster.
But, how did student loan debt get so bad in
the first place and why did refinancing become a viable option?
We Get Here?
Refinancing exists because private companies
realized there had to be a better way to tackle student loan debt repayment.
The best companies in the space offer loans designed to be paid off at a
schedule favorable to borrowers based on their preferences, without overly high
interest rates that prevent them from getting out of debt.
This is a response to the fact that student
loan debt has been rising exponentially for years, and is now a $1.5 trillion
fortune owed by people of all ages that exceeds even America’s credit card
Basically, more young people are going to
college and the cost of attendance is rising, so more people need to take out
loans to afford their tuition.
up this trend. From 2000 to 2015, the number of college-age people rose by
nearly 4 million, coinciding with enrollment rates increasing by 5 percent over
the same period.
When these students did get into school, they
often didn’t have the savings to pay for it due to higher costs of entry.
Tuition for both private and public colleges
, up more than
$10,000 and $5,000, respectively.
So, what could students do? They borrowed
money to cover their tuition, encountering high interest rates on both federal
and private loans.
The government dictates its own rates and does
not promise stability. In fact, for the upcoming academic year, borrowers will
see a rate of
Bank loan rates are variable, too, and are
usually much higher than federal ones.
Why? Simple: private lenders are a business
and need to make money.
But, even though the government doesn’t need
to make a profit off student loans, and it charges a lower interest rate, that
rate is climbing and late payments to federal loans still show up on borrowers’
On top of that, students have a low borrowing
limit, compared to what they can get from private banks. They have to turn to
private lenders to get the remaining money they need.
There’s also an actual supply-and-demand
market for private loans. As more students go off to school, it means they need
money to fund their college educations. If there’s higher demand for loans,
banks can charge more interest.
If fewer students needed to borrow to go to
college, banks might lower their interest rates to attract students on the
cusp. Because loans are in such high demand, banks can charge more to lend
them to afford
And as far as borrowers go, high school seniors
are pretty risky, since they don’t have a credit history or collateral (such as
a house for a mortgage), in case they can’t pay their lenders back. In short,
banks take a risk on student loan borrowers at the cost of their bottom lines
if they happen to default, so they charge more.
For the high school senior, milestones such as
having a baby or buying a house are distant considerations. They have more
pressing things to worry about, such as doing well in their classes and landing
Even so, their loans will impact such life
events down the road.
show that student loan
debt affects the economy because young people aren’t hitting significant
milestones as fast as previous generations (if at all).
Buying a car, getting married, signing a
mortgage, and starting a family are all life events that require savings and
often involve taking out new loans. For borrowers with student loan debt, these
moments are often delayed or put on hold until they find themselves in a more
comfortable financial situation.
In this way, debt is holding back borrowers
from moving on with their lives post-graduation. Other consequences include not
saving, not putting enough away for retirement, and even engaging in less
entrepreneurial activity, since borrowers often can’t afford to start
businesses that drive the economy.
Some call student debt a bubble, while others
fret over rising default rates—
by the Brookings Institution
to reach 40 percent by 2024—as borrowers fail to make their payments. Long
story short, the student loan crisis isn’t going away anytime soon, and the
interest keeps adding up.
Luckily, seeing this growing trend, private
companies arrived, offering a better solution for borrowers.
Four great years of undergrad came and went;
now Amy has graduated and started her job as a back-end developer making
$60,000 a year. She owes upward of $100,000 on her loans, which she’ll pay back
over 120 monthly payments of more than $1200 (including interest) starting
after her grace period ends.
She makes a plan to do some little things to
help her save: forgoing her morning coffee, cooking meals at home rather than
eating out, and selling her old items such as clothes and bags. But, after
doing the math, she realizes saving these small amounts here and there won’t
make a real, noticeable dent in her debt.
Amy has also decided that she wants to go back
to school and get a master’s degree in a couple of years. With that expense on
the horizon, she would love to put her undergraduate debt behind her and start
planning for the future.
Amy starts researching some other options to
save more money and she learns about student loan refinancing companies. These
private companies help borrowers like her achieve their goals: paying off
balances faster and spending less on interest.
She could then put the money she would otherwise
be giving to the government and bank into her savings and, eventually, toward
her master’s degree.
From here, Amy starts diving into specific
companies in the space. She comes across
, a student loan refinancing
company started in 2012 to offer loan repayment solutions for borrowers like
CommonBond can save students thousands, with interest rates starting as low as 2.72 percent—or much less than
what Amy’s paying now. As she reads on, refinancing looks increasingly like the
right choice to help her pay down her debt faster.
CommonBond offers borrowers like Amy a variety
of ways to manage student loan debt, such as the ability to:
- Refinance loans totaling upward of hundreds of thousands of dollars, maxing out at $500,000 (luckily for Amy, she falls well under that ceiling).
- Combine Amy’s federal and private loans into a convenient, single loan.
- Choose a loan that offers a better interest rate and/or more favorable length, as well as the option to restructure the rate to variable (fluctuates with the market) or fixed (remains the same) if she pleases.
- Avoid paying any origination fees (CommonBond never charges origination fees on refinance loans).
- Postpone her payments in the event of economic hardship until she’s back on her feet again—a protection called forbearance.
It’s important to realize that not all private
lenders offer the same borrower protections. For instance, if you have a
federal loan and you decide to refinance, you might be giving up forbearance,
depending on which refinancing company you choose.
CommonBond’s version of forbearance lets
borrowers temporarily postpone payments up to two years (the longest length in
the industry) if they run into financial difficulties.
Other federal programs include loan
forgiveness for graduates who enter certain public-service careers and
income-driven plans based on a “pay as you earn” model. When you refinance, you
can’t revert back to federal loans, so it’s important to consider which
protections you’ll be losing and which you’ll be gaining in the exchange. GB
Note: Why delete the good news?
Amy also learns that that refinancing is different than direct loan
consolidation, offered on federal loans only.
kind of consolidation combines multiple federal education loans into one loan
and one monthly payment, with an interest rate determined by averaging the rates
of all the loans being consolidated.
This process doesn’t actually lower a
borrower’s interest rate--and it wouldn’t work for Amy, because she has both
federal and private loans.
Refinancing sounds like a smart solution for
Amy, and it’s a great idea for similar borrowers who want to consolidate their
federal and private loans, renegotiate the terms of their debt, and save money
When most people sign on to student loan
agreements, they don’t have the financial literacy to know how their choices
will impact them in the years ahead. Eighteen-year-old Amy wasn’t aware of what
those financial terms meant or the gravity of her debt until she had to start
As an adult, and a member of the workforce,
she’s in control of her finances: paying rent and bills, and saving for
retirement. Assuming responsibility for the fate of her student loans is just
the next step in that.
CommonBond helps the millions of borrowers
like Amy, who can reliably pay back their loans if offered terms and rates more
suitable for their circumstances. So why should all those eligible borrowers
consider refinancing their student loans?
It comes down to flexibility, freedom, and
control. Borrowers don’t want to be defined by their debt, or let it hold them
back and slow down the trajectory of their lives. Shedding debt opens new doors
and opportunities, both personal and professional.
By that measure, refinancing lets Amy save for
a graduate degree so she can advance her career. Refinancing can just as easily
help other borrowers achieve their financial goals faster, so they can devote money
to other things they care about.
The possibility of locking in lower rates
and/or different repayment periods means that borrowers have more control over their
financial futures and can progress toward hitting those life milestones faster.
Refinancing can also release old cosigners on
previously held loans, adding additional freedom and autonomy to the ongoing
financial commitment. In so doing, borrowers free up their parents, or other
individuals who signed on to help them qualify for their loans, so they can
take full responsibility and remove any obligation from their cosigners.
Started on Refinancing
Amy, now fully aware of what refinancing is
and how it can save her money, looks up what she needs to know about standard
The sooner borrowers refinance the better,
because added time means more money going toward interest. Borrowers like Amy
face no downside to applying for refinancing, and even if they’re not sure if
they can save, they face no harm in trying. They can always try again later.
She can find out instantly (and for free) how
much she can save through CommonBond, and even after she refinances, she can
always refinance again—so if she improves her credit score, she can lock in an
even lower interest rate on the next go-round.
Young borrowers like Amy refinancing for the
first time can go through the process solo, but, if needed, they can bring on a
cosigner. A cosigner’s credit history might be helpful in case added
credentials are needed to qualify.
The longer a borrower is in the workforce and
is paying bills, the easier it can be for them to qualify because they’ve
developed a credit history with proof of consistently paying their bills.
Qualifications for refinancing through
CommonBond—Amy’s company of choice—include:
- Citizenship: U.S. citizens and permanent residents are eligible to refinance.
- Education: Students who graduated from Title IV accredited universities or graduate programs are eligible for refinancing.
During the application process, CommonBond
will also ask for other information—such as an applicant’s credit score,
income, and employment situation—in order to ultimately determine eligibility.
reveals how much money borrowers like Amy
could be saving by refinancing their loans.
Once a borrower decides they want to
refinance, checks to see how much they could save, and is ready to move forward
with the process, the next step is to compare lenders.
Some things to look out for are the types of
loans each lender handles and the repayment periods and interest rates they
Before choosing a lender, borrowers should get
a sense of some hard numbers to help compare companies. Some stats to keep in
- The minimum and maximum amount of debt the company can refinance: If a borrower’s balance doesn’t fall in the company’s range, they will have to choose a different company that supports their needs. For CommonBond, amount that can be borrowed ranges from $5,000 to $500,000.
- Interest rate ranges: What’s the high end and the low end of the interest rates a customer could end up paying? Also, how can the non-fixed rates fluctuate? Remember, variable and hybrid rates can grow or shrink depending on loan duration and market moves.
- Additional fees: Know what kinds of fees different lenders may charge, such as origination or application fees, disbursement fees, and prepayment fees. Some lenders, such as CommonBond, don’t charge these kinds of fees, while others do.
Beyond lower rates, many student loan
refinancing companies also offer a suite of additional perks to their
With CommonBond, that means access to a networking
community of other borrowers and a Social Promise to fund the educations of
students in the developing world. Such added benefits can move the needle based
on what borrowers are looking for, their values, and their career status.
If you’re like Amy, sold on refinancing
and ready to start saving money, it helps to make a final checklist. Include
both outcomes you’d like to glean from the process and materials you’ll need to
actually apply. This can simplify the application process and come in handy if
and when you choose to refinance again later.
Write down why you’re doing this in the
first place. What’s your objective? Whether it’s a lower interest rate or a
shorter repayment period, write it down.
From there, what are your goals? Financial
freedom, more control, greater flexibility, or something else?
What do you need to apply? It varies
by company, but for CommonBond, it’s very simple. Borrowers go through one
to check their rates
(entering their name, level of education, etc.), and then upload three types of
documents to the portal:
- Proof of employment: An acceptance letter from an employer, two recent pay stubs, or two recent years of tax documents.
- A recent loan statement for each loan the borrower would like to refinance: This should include the servicer’s name, borrower’s name, account number, loan balance, and physical address.
- Proof of residence: A recent utility bill or a bank statement.
Amy is ready to see how
much she can save by refinancing.
She puts her information into CommonBond’s
form, gets her lower monthly rate, and then uploads the three types of necessary
documents onto the portal. It’s as easy as that.
Amy feels empowered by the fact that she’s
taken the first step to controlling her financial future by refinancing. She’s also looking forward
to putting her savings in the bank.
Those funds will power Amy’s personal and
professional goals, such as attending grad school, and help her move onto the
next phase of her life.
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