Man considering student loan refinancing
Financial services company SoFi has agreed to stop misrepresenting what consumers have saved or will save by refinancing their student loans, in a recent settlement with the Federal Trade Commission.
Refinancing debt is when one loan is rolled into another, often at a lower interest rate.
The FTC claimed SoFi "made prominent false statements about loan refinancing savings in television, print, and Internet advertisements," in some cases touting savings double that of what borrowers would actually achieve by signing up with them.
SoFi's ads boasted that their products led to people saving more than $20,000 on average. But, in its calculations, the company excluded student loan borrowers for whom refinancing resulted in a longer, and sometimes more expensive, repayment timeline than they had held prior, according to the FTC.
If the company violates the terms of the settlement, it could face civil penalties, and the FTC says it will notify other lenders making similar savings claims of its action against SoFi.
"Student loan debt is a huge problem facing students and graduates across the country," said FTC Chairman Joe Simons. "Lenders who offer refinancing options must be upfront with students about savings.
"They cannot make deceptive claims and bury the truth in fine print."
A spokesperson for SoFi disagreed that it misleads borrowers.
"We have always been committed to giving our current and prospective members clear and complete information with which to make smart financial choices, and are pleased to have this matter resolved," the spokesperson wrote in an email.
Outstanding student loan debt in the U.S. has tripled over the last decade, and has surpassed auto and credit card debt. Average debt at graduation is currently around $30,000, up from $10,000 in the early 1990s.
Many borrowers turn to refinancing for relief with their student loans. Here's what you should consider.
Will refinancing my student debt save me money?
It only makes sense to refinance your student debt if the interest rate will be lower on all (or most) of your new loans, said Mark Kantrowitz, the publisher of SavingforCollege.com.
You should compare how your monthly bills and total payments would change, he said.
"Keep in mind that comparing loans with different repayment terms is not an apples-to-apples comparison," Kantrowitz said. "A longer repayment term leads to lower monthly payments, but also more interest paid over the life of the loan."
Elaine Griffin Rubin, senior contributor and communications specialist at Edvisors, recommends using their student loan refinancing calculator to make sure the move will actually save you money.
To exchange your student loan rate for a lower one, you typically need to have a great credit score and not too much debt in relation to your income, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a non-profit that helps student loan borrowers with free advice and dispute resolution.
"So if you are looking to refinance because you can't afford your current payments, while certainly worth a shot, you may not end up with the results you were hoping for," Mayotte said.
Will I lose the protections that come with my federal student loans?
Yes. When you refinance a federal loan, it becomes a private loan and, therefore, you will no longer be eligible for the consumer protections the government provides on its debt.
Federal loans allow borrowers to postpone their payments (though sometimes interest accrues during that time).
They also offer the option of an income-driven repayment plan, in which monthly payments are capped at a percentage of your income.
In addition, federal debt can be cancelled if you're disabled and you might qualify for certain loan forgiveness options.
Conversely, Mayotte said, "private student loans generally have few or no lower payment options or other options for relief in times of financial hardship."
Mayotte added that "your rate doesn't matter if you lose your job, or have sudden medical expenses, can't afford your payments and find that defaulting is your only option."
Where should I refinance my student loans?
The Institute of Student Loan Advisors provides a list of lenders and their terms, including their interest rates and repayment options.
Mayotte said they don't recommend one lender over another, but that it's a good source for research.
More from Personal Finance:
What you need to qualify for public service loan forgiveness
Meet these demands and D.C. may forgive your loans
Senators give Education Dept. failing grade on loan forgiveness
