Student Loan Myths

With outstanding student loans in the US soaring to new heights in 2014, it’s not surprising that the topic of education debt has captured its fair share of headlines throughout the year.

One of the year’s biggest stories was the student loan refinance bill put forward by Sen. Elizabeth Warren (D-Mass.), which was twice blocked by Senate Republicans in 2014. The proposed legislation aimed to give borrowers with high interest rate federal student loans the option of refinancing at a lower interest rate – saving them a significant amount of money on interest payments.

No matter what people thought about the finer points of the bill, the fact that it shined a spotlight on high interest rate student loans was a good thing (in my opinion). The vast majority of the $1.2 trillion in outstanding education debt is made up of federal loans, some of which have not offered the most competitive rates over the past several years. In fact, before the Student Loan Certainty Act was passed in 2013, federal unsubsidized and PLUS loan rates had remained flat at 6.8% and 7.9%, respectively, for seven years, while prevailing rates dropped to record lows (see below).

Put another way, homeowners who took out loans in 2006 may have been eligible to refinance in 2012 at nearly half their original rate, but grad school borrowers did not have that option with their federal student loans.  Seems pretty unfair, right?  So you can see why I was glad that this topic was getting some much-needed attention.

But as I read each new article about the Warren bill, I started to notice that an important piece of information always seemed to be missing from the story — and that is this:

Federal student loan refinancing is actually available now.

Granted, the option has only been around for a few short years, but it’s still surprising to me how many journalists failed to mention this in their coverage. In fact, many made definitive statements to the contrary, further perpetuating one of the biggest myths in the student loan space today. And it’s unfortunate, because it may have discouraged a lot of otherwise eligible borrowers from looking into refinancing and potentially saving a sizeable amount of money.

So let’s set the record straight, once and for all: Today, there are several companies that refinance federal student loans, including SoFi (the largest provider of student loan refinancing) and a few other options have come online in the past few years. Refinancing loans at a lower interest rate can help you save money on total interest as well as potentially lower monthly payments or cut your payment term. You can also consolidate multiple loans, federal and private, through the refinancing process — simplifying your monthly bill and payment.

Before refinancing federal loans, you should check to see if you’re eligible for certain federal loan features that don’t transfer to private lenders, such as forgiveness programs for working in public service or education and/or an income-driven repayment plan like Pay As You Earn (PAYE).  But if you don’t benefit from these things, and your first priority is saving money, then refinancing federal loans can be a great solution for reducing your debt burden.

No legislation required.

Daniel Macklin is a member of the DailyWorth Connect program. Read more about the program here.