Student loan refinancing is the (somewhat elusive) process by which a borrower can obtain a lower interest rate on their student loans, often by taking out a new student loan from a different lender. If this new loan comes with a lower interest rate and more favorable repayment terms, the borrower may save a good deal of money, both on a monthly basis and in total over the course of repayment.
Right now, there’s unfortunately no way to refinance federal student loans within the federal student loan system, which is troublesome for many borrowers who have high-interest federal student loans. Private student loan refinancing largely dried up during and after the financial crisis of 2007-2009. However, in the past few years, new and somewhat unique private student loan refinancing companies have begun offering some options to borrowers. Because these companies and their programs are relatively new, and student loans generally must be repaid over a long period of time, we don’t yet know enough about these companies to say with certainty whether they provide viable long-term solutions for borrowers. What we do know is that these programs tend to be geared towards borrowers with excellent credit and good earning potential, which effectively locks out many borrowers who need the most relief.
One of these new student loan refinancing companies is called SoFi (short for “Social Finance”). SoFi offers student loan borrowers with various refinancing options through a unique investor-based funding mechanism. It’s one of the leaders in this nascent industry.
I recently had the opportunity to sit down with a borrower (we’ll call him “Aaron” to protect his privacy) who refinanced his student loans through SoFi. Aaron agreed to share his experience with me, and he even let me review his loan contract with SoFi. As a student loan attorney, this was an exciting opportunity for me to get an inside look at a new type of student loan.
Aaron was fortunate enough to attend college on a full scholarship. However, he still needed to borrow money to cover some of his educational and living expenses, and he graduated with a private Wells Fargo student loan of around $15, 000.00. This loan had a 12.5% interest rate (quite high), and it was on a 30-year fixed repayment term with monthly payments of around $160/month.
Aaron was very unhappy with these loan terms, as he realized that his interest rate was obscenely high and almost of all of his monthly payments were going towards interest (by my calculations, over 90% of Aaron’s initial monthly payments would be going entirely to interest every month). He realized he would pay tens of thousands of dollars in interest before he’d start substantially reducing the principal. So in 2014, Aaron started looking into refinancing options.
Aaron was extremely thorough in his research, and carefully explored every private student loan refinancing program that was available at the time, including one with his current lender. He eventually decided that SoFi was the best option for him based on its advertised programs, their interest rates, and online reviews. He decided to investigate further.
The Initial SoFi Application Process
Aaron was thoroughly impressed with the initial information SoFi offered. According to Aaron, SoFi was “extremely transparent” about the refinancing options it was offering him, and gave him a menu of programs to choose from in terms of repayment terms (five, 10, 20 years, etc.) and interest rates (fixed or variable). SoFi also helped Aaron understand what his monthly payments would look like for each option, and how much he would pay in total (and how much he would save) depending on which option he chose. No other lender, federal or private, had ever been so comprehensive and helpful in walking Aaron through his options.
Aaron decided to submit an application for a SoFi refinancing loan. In a smart move, Aaron decided only to refinance his high-interest private Wells Fargo loan; he did not include his federal student loans in the refinancing, as he knew that he would lose out on important federal student loan benefits like income-driven repayment and Public Service Loan Forgiveness.
The SoFi Application Processing
Aaron was not a fan of how SoFi processed his application, however.
First, SoFi denied his refinancing application. Even though Aaron was refinancing a relatively small amount of debt, had excellent credit with a score of nearly 750, and a good job with a steady income, SoFi determined that Aaron was not a good candidate for refinancing – possibly because of his debt to income ratio, or because of his limited credit history (Aaron had only been out of college for a few years). SoFi suggested that Aaron re-apply with a co-signer, however. He did, and he was pre-approved.
To finalize the application process, SoFi required that Aaron and his co-signer submit documentation of their income. They did so. However, SoFi did not respond for weeks. Aaron followed up, and was told that they had his documentation, but it was out of date now since they required very recent documentation of current income. Aaron and his co-signer then re-submitted their information to SoFi. Again, SoFi did not respond for weeks, and again, Aaron had to affirmatively follow up. Yet again, SoFi required that they resubmit their documentation. This cycle happened at least once more before the documentation was finally accepted and the process could move forward.
The entire application process took nearly four months, and Aaron found this extremely frustrating. He felt that his application was repeatedly “mishandled, ” and he needed to engage in “constant hair-pulling” to get SoFi to move his application along. Aaron was quite disappointed with this, especially as compared to his excellent initial application experience.
The Loan Repayment Period
Ultimately, however, Aaron was approved for a refinanced student loan at a 4.99% interest rate – less than half of the interest rate of his previous Wells Fargo loan. Because his monthly payments were going to be reduced so much, Aaron decided to get on a shorter repayment term, resulting in monthly payments of $241/month. This way, Aaron would repay his loan very quickly (five years or less); approximately 75% of his initial monthly payments would go to principal, and it would only go up from there.
Since obtaining the refinanced loan, Aaron has been happy. He has found his loan servicer to be helpful and responsive, although SoFi just switched Aaron to a new third-party loan servicer – MOHELA (and it’s too soon to tell if this servicer will continue to provide the customer service that he’s been accustomed too). Aaron has also been pleased with some of the “fringe benefits” of SoFi, including free career advice, networking opportunities, merchandising, and other financial services.
The SoFi Loan Contract
Aaron’s story about his SoFi experience was certainly interesting, but I couldn’t wait to get my hands on the SoFi loan contract to investigate the terms and conditions. What I found was quite eye-opening.