The start of the year is a popular time to improve personal finances.
Michael Golfman, a Colorado transplant working in New York City, took a hard look at his student loans around this time last year, choosing to refinance his debt to lower the monthly payments.
The 36-year-old refinanced more than $70,000 of federal and private student loans into one consolidated loan at Citizen’s Bank, a large lender in the student loan refinance space.
“Over the long haul, I’m probably saving about $4,000 to $5,000 , and monthly I’m saving about $75,” the University of Denver grad says. “I freed up a little money, and that justified me getting a car.”
While student loan experts say refinancing isn’t for everyone, it’s one way to lower an interest rate on a student loan and reduce monthly payments.
[See three questions to answer before refinancing student loans.]
An estimated 8 million student loan borrowers — roughly a third of all people who are paying down their student loans — are eligible to refinance their loans at a lower interest rate, according to a recent study by Credible.com, a multi-lender marketplace focused on student loans.
“Refinancing is mostly for the older side — late 20s and 30s — so you’re kind of established in your financial situation, as opposed to being 23 and straight out of college,” says Erin Lowry, author of the upcoming book “Broke Millennial.” “Those folks aren’t focused on it yet; those folks are still trying to get their careers.”
Lowry says refinancing is a good option for those who are more financially secure and don’t need the federal student loan protections, such as public service loan forgiveness, deferment or forbearance. “If it’s lower than your federal loan, why wouldn’t you take it?”
For borrowers interested in refinancing their student debt, here are several projections for 2017.
[Read four things to think about when refinancing student loans.]
1. Interest rate increases: The yield in the 10-year Treasury rate has almost doubled since July to a rate of around 2.6 percent in mid-December.
“We have already seen some lenders increase their rates as a result of what we refer to as the ‘Trump effect’ on the 10-year Treasury,” says Stephen Dash, CEO and founder of Credible.com.
Many lenders, he says, use the 10-year Treasury rate to determine the fixed interest rates for 10-, 15- or 20-year private student loans, which includes those for refinancing.
Experts say some people are trying to lock down the lower interest rates now, since some bank researchers expect the yields on the Treasury to go up in early 2017.
“If you continue to see a rise in the 10-year bond rate beyond what’s expected, then you might see a change in rates,” Dash says about rate increases for longer-term, fixed-rate loans.
2. More innovative refinancing products: One product that’s in its infancy is using home equity as a cash-out refinance to pay down student loans and receive a lower mortgage rate, loan experts say.
Social Finance, Inc., a San Francisco-based online lender commonly called SoFi, launched the product — Student Loan Payoff Refi — last month, which allows homeowners with a loan-to-value ratio of 80 percent or less to do exactly that with their home equity.
[Weigh whether to use your home to pay for college.]
Say a borrower has $40,000 in student loans at a 6.5 percent rate and a home valued at $300,000 with a $200,000 mortgage at a 3.9 interest rate. With the Student Loan Payoff Refi, the home’s equity can be cashed out to pay off the student loans, with the mortgage lowered to a new rate of 3.875 percent. In this case, the monthly payment would go down by more than $100.
“Homeowners who have student loan debt have the opportunity to take that debt and use that to pay off what is typically a higher rate on student loans,” says Michael Tannenbaum, chief revenue officer at SoFi.
The product, Tannenbaum says, is aimed at parents who took out student loans to pay for their kids’ college and at debt-strapped millennials who own a home in relatively inexpensive housing markets.
Fannie Mae is backing the SoFi product; this option, experts say, is expected to be offered by other partner lenders in 2017.
3. An increasing number of lenders in the space: Student loan borrowers can expect to see more lenders enter the student loan refinance market, experts says. With a competitive market, they say consumers will have more choice and tailored options.
“We’re going to continue seeing more lenders in the market. I expect more big banks to get into this space — particularly now with the change in administration,” says Dash, the Credible.com CEO.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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3 Student Loan Refinance Options for 2017 originally appeared on usnews.com
