When Christina Wallace, 31, took out loans to cover her tuition for Harvard Business School in 2008, she was stuck with nearly $100,000 in federal student loans at a fixed rate of 8%. By the time her loans came due in 2010, interest rates had plummeted, but she wasn’t able to take advantage of them and refinance.



As it stands, federal student loan borrowers can consolidate their loans but can’t refinance to lower interest rates available today as one would with a mortgage. A consolidation only averages the rates of your current loans to come up with your new rate.



Government officials are debating whether to allow students to refinance federal student debt. Meanwhile, online start-ups-turned-refinancing-juggernauts SoFi and CommonBond have stepped in to fill that void. And some traditional credit unions and banks, including Darien Rowayton Bank, Alliant Credit Union and Wells Fargo, have followed suit.



Wallace decided to refinance her graduate school debt through CommonBond in 2013. She was able to lower her interest rate to 5.9% from 7.8%, saving her a few hundred dollars a month in interest payments.

“It all seemed too good to be true initially,” says Wallace, who works at the American Museum of Natural History in New York. “But I liked the idea of supporting a New York start-up, and when I ran my calculation on their site, I saw that I could save a lot by refinancing.”

This is all great, but (and this is a big “but”) student loan refinancing is not the panacea for our national student debt problem. Refinancing only works for borrowers in a very specific set of circumstances.



Here are some important factors to consider before you consider student loan refinancing:

1. Broke art majors need not apply.

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We all know that newly minted college graduates aren’t exactly in the greatest financial shape, but if you’ve missed one student loan payment in the past, you could be out of luck if you want to refinance.

“Our program is really not for people who don’t expect to [make payments on time],” says Aryea Aranoff, director of education finance strategy at Connecticut-based Darien Rowayton Bank.

DRB’s refinancing requirements are pretty stiff: They want candidates who have FICO scores of at least 680 and a debt-to-income (DTI) ratio lower than 40%, which means your total debts shouldn’t be more than 40% of your income.

Nontraditional lenders like CommonBond and SoFi don’t necessarily focus exclusively on DTI and credit scores, but they have equally high standards. SoFI requires borrowers to have credit score of at least 700, according to a report by credit ratings industry analyst DRBS, although the company will consider lenders with lower scores if they can prove sufficient cashflow ($2,000+ per month). The average SoFi borrower earns $142,414 per year — three times the avearge 2014 college graduate — and has a credit score of 776*.



CommonBond specifically targets high-earning graduate-degree-holders like Wallace (e.g.: the kind of folks who will likely be able to make payments on time). To be eligible, borrowers must have earned a graduate level degree or higher in a specific field of study like medicine, accounting, law, engineering, or finance, among others. And that degree must have been earned from a list of schools CommonBond has preselected, which varies by industry. For example, they prefer that a borrower who has a Master’s in Finance also hails from one of 13 schools, including Johns Hopkins University or Princeton.



SoFi won’t deny fine arts majors based on their degree alone, says co-founder Dan Macklin. Although educational history is the chief factor they consider before approving a loan applicant, they also judge based on employment history, income, and credit history.

“Our underwriting approach is nontraditional,” Macklin says. “If somebody hasn’t been paying their bills in the past then it counts against them, but it’s not the sole [criterion] we’re looking at.”

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