LACBA Update Back Issues - June 2015

The Truth about Your Student Loan Debt

By Stephen Dash, CEO, Credible, the leading online marketplace for student loan refinancing. www.credible.com/partners/lacba 

Student loans can be a minefield. The average lawyer leaves law school with a student debt of $140,000. Many graduates put off refinancing their student loans simply because they don't understand the process. Here are the most common misconceptions and the true information you need to make an informed decision about your student loan debt.

1. You are stuck with your loans when you graduate. You're not necessarily stuck with your current loans forever. Many graduates refinance their federal and private student loans after graduation or a few years into their career once they have built a credit history. They do this because under certain circumstances, refinancing can result in lower interest rates, lower monthly repayments, and significant savings. By refinancing, the average lawyer sees a savings of $40,104 over the lifetime of his or her loans. If you have a credit score of 640 or higher, you are potentially eligible to reduce your monthly repayments after you graduate.

2. Every lender offers similar rates. Not true. Depending on the lender, interest rates on student loan refinancing products can range from under 2% to well over 8.0%. Lenders offer products based on a graduate's personal situation. Eligibility criteria usually depends on school, income, credit score, and debt balance.

3. Refinancing at a lower rate will result in higher monthly repayments. This isn't true. In fact, most people who refinance their student loans end up with lower monthly repayments, a lower interest rate (or APR), and a lower total repayment amount.

4. You can only refinance your student loans once. Borrowers can refinance as many times as they want. As your income or credit improves, you may become eligible for lower rates than those received in your last refinancing. As a result, it may make sense to explore refinancing at multiple points in your career.

5. Increasing the term of your loan always results in paying more interest. Not necessarily. Increasing the term of your loan may still result in less overall interest if you are able to decrease your rate. There are also no prepayment penalties. This means borrowers can take advantage of lower rates on longer term loans, but pay them off as quickly as they are financially able with more frequent or larger monthly payments. The benefit of this approach is that borrowers can still maintain the flexibility to make the lower monthly payments of a longer term loan should new financial pressures arise.

6. You have to refinance ALL of your student loans. It is up to you to refinance whichever student loans you choose. Graduates often request refinancing for only their higher interest rate loans. Borrowers choose this option because refinancing the highest interest rate loans and leaving the lowest interest rate loans alone can sometimes be the best way to maximize total savings.

7. Shopping around for the best rate will hurt your credit profile. This is simply not the case. The credit bureaus treat "rate shopping" as a single credit pull. According to leading credit score calculator FICO: “In general, student loan shopping inquiries made during a focused time period (for example, 30 days) will have little to no impact on your score.”

8. Consolidation and refinancing are the same thing. Student loan consolidation and student loan refinancing are two different things. Consolidation without refinancing generally means combining your existing loan payments into a single, weighted average payment. Refinancing your student loans is the process of having a lender pay off all or some of your old student loans in exchange for a single, new loan from that new lender.

9. Consolidation is a better option than refinancing. This is not necessarily correct. While consolidation does simplify your payments, you could be giving up borrower benefits from your original repayment plan, such as interest rate discounts, principal rebates, or loan cancellation benefits, without getting a better rate. As the Federal Student Aid website notes, borrowers should be cautious when consolidating their student loans. Borrowers may initially be tempted to consolidate and extend their loan term as it significantly reduces their monthly payment, but this could result in thousands of dollars more in interest.

Overall, there is a great deal of misinformation available about student loans, causing a general lack of understanding. This confusion discourages many graduates from pursuing options to lower their total repayment, potentially losing thousands of dollars. Student loan refinancing is not a one-size-fits-all approach. As a general rule, refinancing makes the most sense when a borrower has high interest rates on his or her loans, a steady income, and a high credit score. Lawyers may find their time well spent by comparing refinancing offers from multiple lenders side-by-side and choosing the offer that is best for them.