As many of you are aware there is a large financial crisis looming over student loans. Student loans are now the second largest portion of consumer debt in the United States, second only to housing. Students loan debt now exceeds over 1.3 trillion dollars (roughly equivalent to the GDP of Australia) and continues to grow. A contributing factor to the problem has been the unprecedented rise of tuition without the corresponding increase in salaries. Fortunately, for many borrowers there are now alternatives for refinancing student loans that can help to reduce monthly payments as well as the total interest paid over the life of the loan.

Is there anything I can do to minimize my student loan debt?

If you’re like me, a fellow professional or graduate student, the enormity of the burden of student loans often sinks in after the forbearance period. For everyone who has maximized their scholarships, limited their spending, attended junior college, and worked through school what else can be done? Although it may be too late to limit the amount borrowed there are now other opportunities to save over the life of your loan.

For the vast majority of medical and professional students, the cost of attendance of graduate school is payed for with federal student loans. In fact, 93% of graduate students utilize federal loans to help pay for school. (http://www.forbes.com/sites/tomanderson/2015/12/15/what-happens-to-student-loans-when-the-fed-raises-rates/#2e9604d0103e ). One often unknown fact regarding federal student loans is that the interest rate is set by Congress and can be found here link. This is important because the interest rate charged on federal loans may not correlate well with current interest rates through private lenders or those set by current economic conditions. https://studentaid.ed.gov/sa/types/loans/interest-rates#older-rates ). You’ll notice that federal graduate student loans rates in the last decade have been as high as 8.5% but interest rates set by the federal reserve have been low since the 2008 financial crisis (http://www.global-rates.com/interest-rates/central-banks/central-bank-america/fed-interest-rate.aspx ). Since 2006 all Federal student loans have been fixed and you’ll notice that the interest rate spread (the difference between interest rate of the borrower and the lender) has increased dramatically and become extremely profitable for the federal government (read more here http://www.huffingtonpost.com/creditcom/the-big-profits-behind-st_b_3271833.html ). Fortunately for consumers, private lenders have recently re-entered the market after the Great Recession and given graduates the ability to refinance rates in-line with todays ultra-low competitive interest rates and not those artificially set by Congress.

What can I do to get a lower rate and is there anything else I should consider before refinancing or consolidating with a private lender?

Recently there have been several private lenders vying to improve the student loan market. Some of these lenders include: SoFi, Common Bond, Citizen Bank, and Darien Rowayton Bank (DRB). All of the lenders offer fixed and variable interest rate products with a competitive interest rate relating to your personal credit score, debt-to-income ratio, and your professional career. Most companies will offer several fixed terms including: 5, 7, 10, 15, and 20 year products allowing the borrower to balance affordable monthly payments while also trying to minimize total interest paid. Unlike federal loans your personal credit worthiness will matter when determining what interest rate you qualify for and what potential savings you may receive. I highly recommend checking your credit score (usually only individuals with healthy scores and finances will qualify for the best rates) and getting your finances in order if you are considering applying. Another potential benefit is consolidating multiple loans under one lender. This allows you to borrow at today’s great rates but only having to make one monthly payment.

Words of caution regarding refinancing or consolidating with a private lender…

Although you may qualify for a better rate there are some benefits to having a federal student loan. Under a federal loan if the borrower is disabled or deceased your loans may be forgiven or canceled. Note that it may be possible to mitigate these risks by adding disability and life insurance policies (probably a good idea to review anyway). Another benefit of federal student loans is a provision for income base repayment. If the borrower is employed in the public service sector and qualifies for income based repayment it may be possible that the remaining balance of his or her federal student loans are forgiven after 10 years of on-time payments (note that most loans are on a 10-year term and it is only beneficial if you qualify for income based repayment and are employed in certain public service fields).

My personal story…

I graduated in 2011 with a professional healthcare degree and approximately 97 thousand in student loan debt. My wife and I worked diligently to pay down the debt and in 2015 I refinanced my remaining $35,000 in student loans with SoFi. I chose SoFi due to their exceptional customer service, quick loan review (especially when compared to other lenders), competitive loan interest rates, and ease of payment through the loan processor. I was able to refinance the $35,000 from a 6.8% to a 3.9% fixed 10-year rate saving me $5,830 over the life of the loan. Note that the average consumer savings advertised by Sofi for graduates who refinance or consolidate a loan is greater than $18,000 over the life of the loan (definitely worth considering for most). Another benefit to SoFi is their networking available to borrowers as well as alternate products they offer from investment service, personal loans and home loans.

If you are interested in receiving a $300 referral for starting a loan with SoFi please send an email to jon.mackay@wsu.edu. Please note that you need start the process with the link in the email in order to qualify for the referral.