Student Loan Refinancing: University Exclusivity Hurts Education Dreams

Student loan refinancing can be a great way to save money, but it's not always an option. For example, if you don't have a degree, many private lenders won't allow you to refinance your student loans. Additionally, refinancing federal student loans into private loans means losing important federal benefits like access to income-driven repayment plans and student loan forgiveness programs. Before deciding to refinance, it's crucial to understand the pros and cons and explore alternative options for those who can't refinance.

Private lenders may allow refinancing without a degree

While refinancing student loans is often associated with having a degree, there are some private lenders that may allow refinancing without a degree. This is good news for the up to 32.9% of undergraduates who do not complete their degree programs, according to EducationData.org.

Lenders That May Allow Refinancing Without a Degree

Several lenders will refinance student loans even if you haven't earned a degree. These include:

• Citizens Bank
• PNC
• MEFA
• Earnest
• INvestEd
• Iowa Student Loan Liquidity Corporation (ISL)
• Rhode Island Student Loan Authority (RISLA)
• Massachusetts Educational Financing Authority (MEFA)

What to Consider When Refinancing Without a Degree

When considering refinancing without a degree, it's important to keep the following in mind:

• Credit score and history: Lenders typically assess your credit score and history, with some requiring a score in the high 600s or higher.
• Income and employment: A stable financial history and healthy income may also be considered, with higher incomes often resulting in better interest rates.
• School accreditation: Some lenders may require that you attended a Title IV school, which is eligible to process federal student aid under the Higher Education Act.
• Cosigner: If you don't meet the qualifications, you may need a cosigner with strong credit and income.

Benefits and Drawbacks of Refinancing

Refinancing can provide benefits such as a lower interest rate or monthly payment. However, there are also drawbacks to consider. For example, refinancing federal loans with a private lender may result in losing access to federal loan repayment options and forgiveness programs.

Alternatives to Refinancing

If you don't qualify for refinancing or want to explore other options, there are several alternatives to consider:

• Income-driven repayment plans: These plans cap payments at a percentage of your income and extend the repayment term.
• Federal loan consolidation: This combines all federal loans into one new federal direct loan, potentially lowering payments by extending the repayment term.
• Improving credit and cash flow: Building your credit history and increasing cash flow can enhance your chances of qualifying for refinancing in the future.
• Applying for forgiveness or repayment assistance programs: The federal and state governments offer loan forgiveness or repayment assistance programs for those who meet certain requirements.

Final Thoughts

While not having a degree may pose challenges when refinancing student loans, there are private lenders that may allow refinancing without a degree. It's important to carefully consider the benefits and drawbacks of refinancing and explore alternative options to make an informed decision.

Federal student loans can't be cancelled without a degree

The U.S. Department of Education's Federal Student Aid (FSA) department is clear that federal student loans cannot be cancelled or forgiven because you didn't get the education or job you expected, or because you didn't complete your education. This is because lenders believe that not having a degree can make it difficult for you to get a high-earning job. College dropouts, on average, make 32.6% less income than bachelor's degree holders and are four times more likely to default on their loans.

However, there are other options for managing your student loan debt if you don't have a degree. Firstly, if you have multiple federal student loans, you can combine them through a Direct Consolidation Loan. This simplifies your loan repayment plan and can give you access to income-driven repayment plans or the Public Service Loan Forgiveness program. Secondly, you can apply for an income-driven repayment plan, which will determine your monthly payment based on your income and family size. Under these plans, your remaining loan balance may be eligible for forgiveness after 20 or 25 years. Thirdly, you can request a forbearance or deferment, which will allow you to temporarily pause your student loan payments if you are experiencing financial hardship. Finally, you can consider refinancing your student loans with a private lender, although this option will cause you to lose access to federal student loan forgiveness programs.

Federal student loan refinancing means losing benefits

Refinancing federal student loans with a private lender means losing access to federal loan benefits. These benefits include:

• Income-driven repayment plans: Federal loans offer income-driven repayment plans that can make monthly payments more manageable, especially for those with lower incomes. These plans adjust payments based on income and family size, and any remaining debt is forgiven after 20 to 25 years of repayment. While some private lenders offer similar plans, they are rare.
• Student loan forgiveness: Federal loan forgiveness programs are available for those working in public service, teaching, or for a nonprofit. For instance, the Public Service Loan Forgiveness (PSLF) program forgives the remaining loan balance after 120 qualifying and on-time monthly payments and 10 years of public service work. Private loans are not eligible for PSLF.
• Interest-free payment postponements: Federal loans offer the option to temporarily pause repayments via deferment or forbearance if the borrower loses their job or faces financial difficulties. During deferment, interest does not accrue on subsidized federal loans, while interest accrues on unsubsidized loans and all loans during forbearance (although the government waived this interest during the COVID-19 pandemic). Private lenders may offer postponement options, but borrowers are always responsible for the interest.
• Loan discharge options: Remaining federal debt may be discharged in certain instances, such as school fraud or if the borrower dies or becomes permanently disabled. Discharge options vary by private lender.
• Other benefits: Federal loans also provide access to potential loan forgiveness for those with permanent disabilities, flexible terms and conditions, possible interest subsidies, limits on monthly payment amounts, and possible student loan tax deductions.

Alternatives to Refinancing

If you are considering refinancing your federal student loans but want to retain these benefits, there are alternative options to explore:

• Direct consolidation loan: You can consolidate multiple federal student loans into one loan with the federal Department of Education. This simplifies repayment, allows for extending the repayment term, and may provide access to repayment and forgiveness programs. However, a direct consolidation loan will not lower your interest rate or save you money, as the new interest rate is the weighted average of previous loans, rounded up to the nearest one-eighth of a percent.
• Income-driven repayment plans: Federal loan borrowers can apply for income-driven repayment plans, which adjust monthly payments based on income and family size. There are currently four plans available, and all of them forgive any remaining loan balance after 25 years of repayment.
• Loan forgiveness programs: The federal government and many state governments offer student loan forgiveness programs for those who meet certain requirements. For example, the Public Service Loan Forgiveness program forgives the remaining loan balance for those working for a government agency or eligible nonprofit organization after 120 qualifying payments. The Teacher Loan Forgiveness Program offers up to $17,500 in forgiveness for teachers working in low-income schools or education service agencies for five years.
• Repayment assistance programs: Although not technically loan forgiveness, repayment assistance programs can help pay down student debt. Examples include the National Health Service Corps Loan Repayment Program, the Nurse Corps Loan Repayment Program, and the Army and Navy Student Loan Repayment Programs. Some private employers also offer student loan repayment assistance as an employee benefit.
• Deferment or forbearance: If you are facing financial hardship, you may be eligible for a reduced payment or a temporary pause on your payments through deferment or forbearance. Interest typically continues to accrue during this period, except for subsidized federal loans during deferment.

You need a good credit score to refinance

A good credit score is essential if you want to refinance your student loans. Lenders use your credit score to assess your creditworthiness and predict the likelihood of you paying back a loan on time. A higher credit score indicates that you are more likely to make timely payments, while a lower score suggests that you may have suboptimal credit habits or have struggled with loan payments in the past.

The minimum credit score required for student loan refinancing varies across lenders but is typically in the mid-600s. For instance, lenders like Earnest require a minimum score of 650, while others may accept scores in the 'fair' range of 580-669. However, it's important to note that a score at the lower end of a lender's range will result in less favourable loan terms, such as higher interest rates and monthly payments.

If you don't have a strong credit score, you can consider applying for refinancing with a co-signer who has a better credit history. In this case, the co-signer shares responsibility for the loan, and their credit score will be impacted if payments are missed. Alternatively, you can focus on improving your credit score by making timely debt payments, keeping credit card balances low, and monitoring your credit report.

Some lenders require a minimum loan amount

When it comes to refinancing student loans, there are several factors that come into play. One important consideration is the minimum loan amount required by lenders. Here are some key points to note about this aspect:

Minimum Loan Amount Requirements

Lenders typically have a minimum refinancing amount, which refers to the outstanding balance on your loan. This requirement ensures that the lender can generate sufficient interest income from the loan. The minimum amount varies across lenders, with many setting it between $5,000 and $10,000. It's important to inquire about the minimum refinancing amount with your lender to ensure they meet your needs. If their minimum is too high, consider exploring other lenders who can accommodate a lower amount.

Impact on Interest Rates and Monthly Payments

The minimum loan amount required by lenders can impact the interest rates and monthly payments of your refinanced student loan. Lenders need to ensure that the loan is worth their time and effort, and a higher balance can make it more feasible to offer competitive interest rates. Additionally, a larger loan amount may provide more flexibility in structuring monthly payments that align with your financial situation.

Comparison Shopping

When considering refinancing, it's beneficial to compare offers from multiple lenders. By shopping around, you can find a lender that not only meets your minimum loan amount requirements but also offers favourable terms. This process can help you secure a lower interest rate, more affordable monthly payments, or both. It's worth noting that some lenders may be more flexible with their minimum requirements, especially if you have a strong credit history or a co-signer.

Co-signers

If you're struggling to meet the minimum loan amount requirements on your own, consider enlisting the help of a co-signer. A co-signer is typically a creditworthy individual, such as a parent or guardian, who agrees to share responsibility for the loan. This can increase your chances of qualifying for refinancing and may even help you obtain a lower interest rate. However, it's important to remember that your co-signer will be legally responsible for the loan if you fail to make payments.

Weighing the Benefits and Risks

Before deciding to refinance your student loans, it's crucial to weigh the benefits against the potential risks. Refinancing can provide lower interest rates and more manageable monthly payments. However, it's important to remember that refinancing federal student loans into private loans will result in the loss of certain benefits, such as income-driven repayment plans and loan forgiveness programs. Carefully consider your financial situation and goals before making a decision.

Frequently asked questions