Student loan refinancing: Save thousands of dollars with these 5 smart moves

ByJames Dennin

The student debt crisis can't be ignored this election season: Nearly one in four Americans between age 18 and 26 say the burden of education loans will influence their vote this November "a great deal," according to a recent Bank of America/USA TODAY survey.

You could hardly blame them. The latest batch of graduates in 2016 are averaging over $37,000 in loans per student, per recent government data.

There are certainly small smart steps borrowers can make to mitigate the damage. Getting an early start on payments by ignoring your six-month so-called grace period — for example — will save you cash in the long run, said Kristina Ellis, author of How to Graduate Debt Free. 

"Unless you have a subsidized student loan or a special offer ... your interest will start accruing the day you sign the papers," Ellis told Mic via email. "Meaning, even if you are given permission to skip payments while in school and for a 'grace period' after graduation, your loan doesn't stop growing."

So you should try making at least a basic interest payment to avoid compounding debt, she suggested.  

Now, it might be too late for that if you are a recent graduate — as the grace period on Stafford loans for students who got diplomas in May ends in November.

But it's not too late to make other moves that will reduce your loan payments. If you've got good credit, you might be able to save thousands of dollars by refinancing your loans at a better rate, for example.

And if your credit sucks? No worries — we still got you.

Refinancing your student loans may save you five figures — but there are a lot of "ifs."

Put simply, refinancing is when you get another bank or lender to buy out the remainder of your loan at a better interest rate.

Companies like Earnest and SoFi refinance student loans, and claim their clients average between about $17,000 and $20,000 in savings over the course of repayment.

Indeed, students should look into refinancing at the least: Nearly 38% of borrowers don't even know it's an option, according to a survey by Student Loan Hero.   

But some people are more likely to save big than others.

Refinancing is easiest if you've got good credit — between 660 and 700 at least, to get the lowest interest rates, said Mandi Woodruff, executive editor of MagnifyMoney. And you've got to keep realistic expectations: Those borrowers who actually end up saving five figures are very likely high-earners with six-figure debt, Woodruff said. Think doctors and lawyers.

Another factor is timing. Some recent grads can save by refinancing, but the benefit is bigger if you were unlucky enough to take out your loans in the mid-2000s or earlier — when interest rates were far higher than they are today. Refinancing now would easily save those folks thousands of dollars. 

For instance, in 2007 and 2008 the interest rates on federal direct student loans were as high as 8.25% in some cases. Depending on your credit, refinancers like Earnest and SoFi today issue rates between 3.50% to 7.45%

You can find lots of rankings of the different banks which offer student loan refinancing on personal finance sites like NerdWallet and MagnifyMoney, both of which publish comprehensive rankings each year. 

One caveat, if you're thinking of refinancing from a government to a private loan — as opposed to switching from one to another private lender — is that you'll lose some of the protections that come with a federal loan. Those include eligibility for federal loan consolidation — or the option of delaying payments through "forbearance" if you experience financial hardship.

"They're not there to cushion you if you can't make payments," Woodruff said.

Ted S. Warren/AP

Lest you get too despondent: Democratic presidential nominee Hillary Clinton has proposed making it possible to refinance federal loans without working with a private lender — and that's a big deal, said Andy Josuweit of Student Loan Hero. 

"Private lenders mostly only serve borrowers with exceptional income and credit right now," he said.

Indeed, the industry is still very new, which is partly why refinancing through a private lender is so unfamiliar to many education borrowers, explained Woodruff. In just the last half-decade, the number of online lenders doing student loan refinancing has roughly quintupled.

Bad credit? Start by getting your score up. 

As Rendón pointed out, refinancing is best for a select few, so it's not hard to find angry reviews of private loan refinancers online. Many borrowers complain of getting offered sky-high rates — or getting rejected outright.

If you find yourself in that situation, "the frustrating but simple answer is to take some time and try and improve your credit," Woodruff said.

Luckily, there are a lot of ways to improve your credit score.

First, make sure you're making your student loan payments on time, since payment history alone accounts for a significant portion of your credit score

Next, it might make sense to take a look at how carefully you are paying off credit card bills, since credit card payments are weighted even more heavily than student loan payments in your score.

Credit utilization — the ratio of your monthly balance to your card limit — makes up a full 30% of your FICO score: Lower is better. So simply negotiating a higher credit limit, assuming you keep spending under control and pay your bill fastidiously, will likely put you in a better position to refinance.

Finally, another way to improve your credit score might be to simply call your card company and ask for help, said Bethy Hardeman, chief consumer advocate at Credit Karma, via email. 

"If you have a good history of making on-time payments, banks may be willing to waive fees or work out payment plans for you," she said. "Having a savings account with the bank or being a long-time customer can be to your advantage, too."

Mark Lennihan/AP

Watch out for "loan forgiveness" and "loan relief" scams.

One of the most unfortunate byproducts of rising student debt is the preponderance of student loan relief scams. 

They're incredibly pervasive, and use aggressive marketing. A recent NerdWallet survey found that some 60% of borrowers reported seeing ads or being solicited for some sort of loan relief.

These ads are often misleading. 

For instance, last April after President Barack Obama announced a series of new repayment plans aimed at making student debt more manageable, reports surfaced of people seeing ads for an "Obama student loan forgiveness program" — which didn't actually exist.

Luckily, there's a relatively easy way to spot such scams: They ask you for money.

Applying for federal student loan consolidation or income-based repayment (which can lead to forgiveness) is always completely free, meaning you should always be suspect of any company asking for upfront payments

"If it sounds too good to be true it probably is," Woodruff said. "Google everything."

Weigh the pros and cons of income-based repayment plans.

If you're having trouble making payments or are worried about defaulting — which can get you in serious trouble, since your whole balance will become due — then income-based repayment is something to consider.

There are four different kinds of income-based repayment plans that you can apply for through the Federal Office of Student Aid: They are very similar but have slightly different fine print, including longer or shorter repayment periods.

Once the repayment period — usually between 20 and 25 years — is over, the remaining balance of the loan is forgiven.

Generally, these plans all cap your interest payments at 10% of your discretionary income — aka the money you have left over after paying rent, taxes, and buying food — so you won't have to shell out more than a tenth of your spending money on loan payments each month.

But one big caveat to remember, particularly if your repayment period ends up being longer than the typical decade, is the longer you're making payments, the more interest you're racking up.

Then again, people in certain professions may be eligible through income-based repayment to have their loans forgiven even sooner than 20 or 25 years: Teachers, and some people working in non-profits, for instance, can have their loans forgiven after 120 on-time payments — a decade, typically — under the Public Student Loan Forgiveness program.

You can apply for these programs for free here

David McNew/Getty Images

Realize your student loan situation is better than you think.

No, seriously.

Looking just at the numbers, it's natural to feel overwhelmed by our student debt crisis, said Beth Akers, a senior fellow at the Manhattan Institute and co-author of Game of Loans: The Rhetoric and Reality of Student Debt

"The $1.2 trillion number is very scary," she said. "People grab onto that number without really understanding what that means for a typical student."

The media bears some blame for this: A 2014 analysis of 100 news stories featuring people with student loans found that their average debt load was $85,400 — nearly three times the true national average at the time.

In fact, while some of the reasons for rising debt levels are bad, others are actually kind of good, indicating rising education levels among Americans.

"Fifty percent of the run-up in debt is coming from increases in tuition alone," Akers said. "[But] the other factor is people are getting more education. People are getting more degrees and more people are entering the system."

Many of those people are low-income Americans, who are more likely to need to rely on some debt to finance their education. But evidence suggests financing higher education with debt remains a pretty good investment, even for them.

And while yes, 69% of students report feeling stressed about their student loans, according to Credit Karma, 85% still believe that their degree is worth it.

So, before you begin calling bankers or tearing your apartment apart in search of that long-lost FAFSA, maybe start attacking your student loan problems by taking a long, deep breath.

Or start looking into jobs that pay more.

October 12, 2016, 12:07 p.m.: This story has been updated to reflect the source of comment from Student Loan Hero.