Why Millennials Won’t Refinance Student Loans
19 September 2016
Conversation about higher education invariably turns toward student loans, since it appears that the two go hand in hand. Among the 42 million people who have $1.3 trillion in student loan debt, Consumer Reports advises students against dropping out of college since they will have an even more difficult time repaying their debt if they don’t have a degree.
There’s a growing chorus of people in favor of letting STEM majors receive higher student loan amounts since they’re more likely to land high-paying jobs, and presumably, repay the money they’ve borrowed.
Now, the 2016 Student Loan Hero Refinancing Survey reveals that millennials won’t refinance their student loans – and it’s not because they aren’t aware of this option. Selected excerpts from the survey are below:
When asked about familiarity with refinancing student loans:
62.11% Are familiar with student loan financing
37.89% Are not familiar with student loan financing
When asked if they’d refinanced their student loans:
69.16% No. Have not refinanced
13.73% Yes. Only my federal student loans
13.51% Yes. Both federal and private student loans
3.59% Yes. Only my private student loans
When asked why they had not refinanced their student loans:
23.40% Were not aware of student loan refinancing
20.09% Wish to remain on income-driven repayment
15.14% Already refinanced student loans
8.35% Plan to receive student loan forgiveness
1.96% Refinancing application was rejected
31.05% Other reason
When asked the main reason they have/would refinance their student loans:
33.38% Lower interest rate
25.93% Lower monthly payments
12.93% Not sure/don’t know what refinancing is
2.81% Transfer Parent PLUS loans to child/student
2.56% Convert variable rate loan to fixed rate: 2.56%
2.40% Release a cosigner
When asked if they would be willing to give up access to federal student loan repayment options such as income-driven repayment and forgiveness in exchange for a lower interest rate:
39.40% Not sure
Why millennials won’t refinance
If refinancing could help borrowers, then it seems curious that millennials won’t refinance. Andrew Josuweit, CEO of Student Loan Hero tells GoodCall, “While private student loan refinancing, through an option like SoFi or Earnest, certainly helps some student loan borrowers, it simply isn’t a solution that will help all student loan borrowers.” Joseweit explains that certain eligibility requirements have to be met, and it’s often the case that borrowers don’t meet the private lender’s conditions.
Josh Alpert, founder and president of Alpert Retirement Advising in Royal Oak, MI, agrees with that take on why millennials won’t refinance and adds, “Refinancing student loans to a lower interest rate requires credit and it is rather difficult for recent college graduates to have an excellent credit score.” It’s not that they’ve ruined their credit in college, but Alpert tells GoodCall, “Often, Millennials have not had the ability and/or time to build credit to a level where they could even be eligible to get the lowest possible interest rate.”
But beyond that, many millennials won’t refinance. Josuweit says borrowers with federal student loans don’t want to forfeit their repayment options. “For example, it’s currently impossible to refinance federal student loans while also maintaining eligibility for any kind of student loan forgiveness,” says Josuweit. For many borrowers, the issue is remaining on an income-driven repayment plan – and Josuweit says this is not allowed when the student loans are refinanced.
Wouldn’t a lower interest rate be more important? No, according to Scott Kolcz, a student loan counselor at GreenPath Financial Wellness, a nonprofit financial counseling and education organization. For a majority of college grads, Kolcz says payment flexibility is more important than a lower interest rate. “Graduates are just entering the workforce and may be receiving relatively low wages; they will also have other bills to pay.” And Kolcz tells GoodCall that most of them don’t want to stay at home with their parents to pay off their loans, so flexibility is critical.
And since they don’t want to live at home, Alpert explains, these grads will have large ‘start-up’ expenses such as renting an apartment, purchasing work clothes, obtaining insurance, etcetera, so payment flexibility is of far greater value than a reduced total long-term payoff.”
But students are paying a high price for this flexibility. According to Josuweit, “One serious problem with this is not only are borrowers not able to access lower interest rates with refinancing, but many are actually adding extra interest to their student loans by decreasing monthly payments with an income-driven repayment plan.” It’s a catch 22, but many young borrowers don’t think they have a viable alternative.
What else should borrowers know about refinancing?
Regarding consolidation, Kolcz says, “Students can consolidate all of their federal debt together and still qualify for an income based repayment plan.” But he says the interest rate will usually increase, based on how it is calculated. “It is the aggregate of all interest rates rounded up the nearest 1/8 of a percent.”
And Kolcz warns borrowers against refinancing into private loans. “Financial institutions are not as flexible as federal loans, loan forgiveness options may be lost, and a co-signer may be required.”
Lisa Kaess, founder of Feminomics, tells GoodCall that she certainly understands why recent grads may want to keep a low monthly payment to preserve their cash flow.
Whether they refinance or not, Kaess offers the following tips:
A variety of repayment programs exist for federal student loans that do not exist in the private sector, options are capped at 10, 15, or 20 percent of your discretionary income. Also, borrowers may give up options for future loan forgiveness (and this is not only for those working in the public sector).
Bear in mind that a lower maximum amount will reduce monthly payments (helping cash flow) but will lengthen the time it takes to pay them off. Your monthly payment can adjust if there’s a change in income, and/or if you start a family. Here’s a Department of Education table that’s helpful: https://studentaid.ed.gov/sa/repay-loans/understand/plans.
Also it’s important to remember that federal student loans have no prepayment penalty – which means you can always pay more. So again, while the headline borrowing rate may be higher, paying a bit more when you can (maybe after an annual bonus, payment from a side gig) will reduce the amount of time it takes you to pay off that loan, which in turn cuts down on the actual interest paid.
Finally, and this applies to borrowing more generally, it never hurts to inquire whether making automatic monthly payments will reduce the borrowing cost. Borrowers with good payment history can sometimes get a reduced payment as well.