Student loan debt surpassed $1.3 trillion in the United States in 2017 – and nearly 3,000 loans go into default every day, according to federal regulators.
It’s common for a graduate with a four-year degree to leave school with anywhere between $26,000 and $32,000 in loans.
With so many Americans struggling to pay for their education, some turn to a booming industry – refinancing. Experts and industry insiders agree – it can have benefits, but also risks.
10News reporter Michael Crowe spoke to both sides to Verify if refinancing is worth it.
Dr. Suzan Murphy has taught in the University of Tennessee finance department for 22 years. She also leads a class on financial literacy.
BACKGROUND: Suzan Murphy
“It’s not fun, but it’s necessary,” she said. “And it’s become so complicated.”
She said many students leave school with debt, and often don’t understand the technical financial terms involved.
“A lot of students unfortunately are surprised when they get out of school and have to start paying back the funds,” she said.
She said on its face, refinancing can be an attractive option – often offering borrowers lower monthly payments. The practice essentially sells existing debt to a new lender under new terms.
But she said the payments aren’t the whole story. Often that comes at the expense of a longer lifetime of a loan.
“Do not sign up for longer, because you’re paying more interest on the loan,” Murphy said.
Social Finace, or SoFi, started offering student loan refinancing in 2011. The company said over the lifetime of a loan, they can save customers $30,000 on average.
SOURCE: SoFi Frequently Asked Questions
Wilson Pappo is Senior Product Manager of student loans. He said many customers choose to refinance their unsubsidized loans that have a higher interest rate, while leaving their subsidized loans as-is.
He believes 80 percent of borrowers could benefit from private refinancing, but said some might have better options.
“We are a very good private option, but if you work in the public sector, work for a non-profit, work as a teacher – there are national programs that can be of much better impact to your financial freedom and you should always start with those to see if you can take advantage of them,” Pappo said.
Refinancing does come with some sacrifices: for example, student with federal loans lose the ability to pause payments if they go back to school.
Still, Pappo said business is booming, as students look for more affordable options. He also hopes through competition, companies like SoFi can help drive down interest rates across the market.
“It’s something that can save you $10,000, $20,000, $30,000 or more dollars, and that’s worth your time,” Pappo said. “That’s not a drop in the bucket, it’s a very significant change you can have personally and independently that can help you in the future.”
Nadia Keyes, who manages financial aid at Pellissippi State Community College, said to consider the many other options available before private refinancing.
She said PSCC has had success with its Default Aversion unit, which keeps in touch with graduates to make sure they're handling payments.
She answered questions in a Facebook live Thursday.
Murphy agrees that many people could benefit from the practice. But she warns – carefully examine the terms, because extending the terms of the loan could cost significant money in the long run.
“We’re talking about thousands of dollars in extra interest you’re going to be paying on that loan,” she said.
She added a few more points to check in any loan agreement:
- Length and interest rate of the loan
- Whether the interest rate is variable or fixed (Fixed is best right now, she says, because rates are low)
- Check for up-front origination fees
- And no matter what, compare offers and read the contract carefully
- Consider if you might be eligible for income based repayment plans