Using Student Loan Refinancing To Help Clients Achieve Their Financial Goals

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January 11, 2017

With over 44 million Americans currently carrying more than $1.4 trillion in student loan debt, financial advisors are likely seeing more and more clients come in the door with significant student debt on their personal balance sheets.

If you're a financial advisor, your first instinct might be to help your clients tackle their student debt with a budget and a repayment plan. But there is now an additional avenue to explore: student loan refinancing. When your clients refinance, they could unlock a potential $15,000 savings or investment opportunity.

Just how does this work? At CommonBond, our customers save an average of $15,114 over the life of their loans when they refinance their student loans. That creates a surplus that financial advisors can help clients allocate to bring them one step closer to their financial goals – be it short term liquidity, savings, home purchase, retirement, or even investment goals.

For clients who decide to use the savings as an investment asset, that amount could end up growing to as much as $20,138 over ten years, if invested monthly in just a stock market index ETF.

The opportunity is even more substantial for clients with graduate degrees and higher-than-average student loan debt. At CommonBond, we find that doctors can save up to $30,051 and dentists can save up to $31,824 by refinancing their loans – substantial savings that can help clients make significant strides towards their financial goals.

Read on to see how financial advisors can use student loan refinancing to unlock new opportunities for their clients.

Where do the savings come from?

To understand where potential student loan savings come from, you need to understand the back story: for the last 10 years, Federal student loans – including the Perkins, Direct, and PLUS loan programs – have been set at a fixed rate every school year, and that rate has been as high as 8.5% in some years. These interest rates, coupled with hefty origination fees that are tacked-on, can leave graduates feeling like they are drowning in student debt. And, unfortunately, the Federal government does not offer a refinancing option for students to reduce the rates on their fixed-rate loans (you may be familiar with federal loan consolidation, which does not result in savings, as it simply allows a borrower to combine multiple federal loans into one loan with a weighted average interest rate of their original loans).

However, private student lenders like CommonBond offer borrowers the opportunity to refinance their student debt at lower interest rates based on their financial profile and credit history. For example, CommonBond uses data and technology to get to know prospective members and offer them a tailored interest rate that is lower than what they're paying on their existing loans. Customers interested in student loan refinancing have different (usually stronger) credit profiles and earning potentials than then they did when they originally took out their student loans, which means they are now able to get a lower interest rate.

Interested in sharing more information about student loan refinancing with your clients? Share this quick Guide to Student Loan Refinancing with them.

How should a financial advisor evaluate if refinancing is right for their client?

In order to qualify for student loan refinancing, clients need to meet certain criteria. At a high level, CommonBond requires that prospective borrowers:

Have a good income or good job offer. Have sufficient cash flow (simply, they make more than their monthly obligations). Have a good credit score (670+) are current and in good standing on their loans.

If clients don't qualify based on these criteria, some lenders, like CommonBond, allow them to add a co-signer to help with the approval process.

It's important to keep in mind that clients with Federal student loans may be giving up access to certain protections like deferment and forbearance when they refinance with a private lender (though certain lenders, like CommonBond, do offer them), as well as eligibility for federal income-driven repayment plans and Public Service Loan Forgiveness. As a financial advisor, you can provide valuable advice on whether your clients are truly eligible for these protections depending on their financial and career plans, and whether this should impact their decision to refinance their student loans.

How to get started

Once you've determined if student loan refinancing is right for your clients, you're ready to help your clients compare options using the following quick checklist:

First, identify each of your client's student loans, whether they are fixed or floating rate loans, and their associated rates. Clients can have multiple student loans, each with different rates because they had to apply annually for student loans and might have qualified for multiple loans under different programs in a given year. Identify which loans your client should refinance, and which ones they should not refinance.

Second, identify the refinance interest rates that your client is eligible for. At CommonBond, clients can get an instant quote by answering a few questions, with no impact to their credit rating and no commitment whatsoever. CommonBond also doesn't charge any prepayment or origination fees with student loan refinancing, which is not always the case with other lenders.

Third, consider the type of loan your client should opt for. There are several factors to explore including weighing fixed versus variable rate loans and choosing the loan term that best aligns with clients' other financial goals (many lenders offer 5, 7, 10, 15, and 20-year loan terms).

Fourth, consider what lenders offer with regards to protections, benefits, and customer service. Some lenders, like CommonBond, offer deferment and forbearance plans as well as excellent customer service.

Refinancing Can Be a "Slam Dunk"

It's clear that student loan refinancing can be a great opportunity for financial advisors to share with their clients. The savings it provides gives clients options. By freeing up additional cash, a financial planner can have a clear discussion about how clients should us that cash from saving to investing.

Douglas A. Boneparth, a financial advisor and the President of Bone Fide Wealth, has found that his knowledge on student loan refinancing has greatly helped his clients. "I've recommended that my clients refinance their student loans to either lower their monthly payments, reduce the term of their loan or a combination of the two," he said. "In many cases, it's a slam dunk and can dramatically improve cash flow and their personal balance sheet."

110-Year Treasury Bond cumulative value is calculated based on an annual return rate of 2.14%. Annual return rate calculated based on daily return rate over last 5 years per the Federal Reserve Bank. Total Bond Market ETF cumulative value is calculated based on an annual return rate of 4.83% and excludes fees and expenses associated with the ETF. Annual return rate represents returns from Vanguard's Total Bond Market ETF since inception in 2007. Total Stock Market ETF cumulative value is calculated based on an annual return rate of 6.19% and excludes fees and expenses associated with the ETF. Annual return rate represents returns from Vanguard's Total Stock Market ETF since inception in 2001.

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