Of the $1.3 trillion in unpaid student loan debt circulating in the U.S. today, a whopping $211 billion of those loans should be eligible for refinancing, according to a recent report by Goldman Sachs Bank USA. Refinancing student loan debt can be best way to lower your interest rate or achieve more affordable payments.
There are a handful of private companies and banks that offer student loan refinancing options today. These companies may offer tantalizing rates of 2-7%, but they also make it exceedingly difficult for borrowers to qualify. For example, the average SoFi borrower is in far better shape than most college graduates. She earns $142,414 per year and has a credit score of 776, according to a report by credit ratings industry analyst DRBS. Meanwhile, the average 2015 college graduate earns just over $51,000 and 40% of people under the age of 30 have credit scores under under 600.
The good news is that an increasing number of states are getting into the business, providing more competition for existing refinance lenders. This is a relatively new trend. When the federal government began issuing student loans directly back in 2010, most states got out of the student loan business altogether. Today, 11 states offer programs that allow borrowers to refinance their student loans, with about a dozen more programs in the works Many of these refinancing programs are still in their infancy. As of December 2015 — 18 months into its launch — Rhode Island's refinance program had only refinanced loans for 349 borrowers, according to the Pew Charitable Trusts.
Are state-run refinance programs worth it?
We decided to take a deeper look at the programs that exist today. What we found is a mixed bag of opportunities. While some states do have more relaxed standards than private lenders, many offer the best refinancing rates to borrowers who have the best credit. Most of the programs we reviewed required FICO scores of at least 670-700. The best rates are reserved for those who either have a cosigner or a top notch FICO score. And a borrower’s FICO score is just the beginning. Many programs won’t extend loans to borrowers who have a history of missing student loan payments or who have filed bankruptcy in the past. Other programs require a cosigner or ask that borrowers meet a minimum annual income threshold.
Whether borrowers are considering refinancing student loan debt through a commercial lender or a state-run program, it's important to realize there is no silver bullet for student debt.
"Just because a loan is made by a state lender doesn't mean that it is better or worse than a loan from a commercial lender," says Mark Kantrowitz, a student loan expert and publisher of Cappex.com. "Borrowers should shop around, applying to several loans to see which lender will offer them the lowest cost loan."
Refinancing federal student loan debt is an especially tricky decision to make, whether you're considering private commercial or state-backed refi loans. College students who borrowed federal loans in the late 90s and early 2000s could easily find themselves stuck with interest rates as high as 8%. As it stands, the only way to refinance those loans to get a better rate is to apply for a federal direct consolidation loan. This loan does allow borrowers to refinance, but it merely takes the average of the interest rates of all their loans in order to determine your new rate. If their loan rates are all similar, a direct consolidation loan really won't make all that much of a difference in the long-run.
There are other stakes to consider when it comes to refinancing federal student loan debt. When a borrower refinances their federal student loans, they are essentially swapping out federal loans for a private loan. That means they will forfeit all of the protections they have as a federal student loan borrower. They won't be able to take advantage of flexible repayment options like PAYE, income-based repayment plans or public service loan forgiveness.
Timing is important, too. Borrowers are usually better off waiting a few years until after they graduate to pursue refinance options, Kantrowitz says. Many borrowers may need time after college to build up their credit before refinance becomes a viable option.
"It takes a few years after graduation of managing one's credit responsibly for a borrower's credit score to improve enough that they will qualify for a better rate," Kantrowitz says.
Lastly, refinance or consolidation loans are not always the best ways to save money in the long-term. If borrowers choose to take on loan with a longer repayment period, while their monthly payments and interest rate may be lower, they could end up paying more in total interest over time.
We’ve identified all of the states that offer refinancing programs in the U.S. in the map above. Below, we offer details on each state's program, from what it takes to qualify to what rates they offer. Because some states are in the process of launching refinancing programs, we have included those as well.
Don't see your state on the list? Don't give up just yet. Some states allow any borrower — regardless of their home state — to apply for refinancing.
(The information below is current as of Aug. 5, 2016.)
Iowa: Reset Loans
Iowa's refinancing program, Reset Loans, is run by a non-profit called Iowa Student Loan. The organization is overseen by a board of directors appointed by the state's governor.
This program is still technically in pilot mode until lawmakers in DC offer some more clarification on the full extent of allowable uses of tax-exempt bonds, but don’t let that stop you from applying. For a pilot program, it’s robust.
Eligibility: Anyone from any state in the U.S. can apply, but Iowa residents are eligible for slightly lower interest rates.
Repayment terms: They offer 5-, 10- and 15-year loan terms.
Interest rate: See a full list of rates here.
The lowest available rates for a credit score of 830 or higher are:
- 5-year term: 4.24% (residents) and 4.49% (non-residents)
- 10-year term: 5.30% (residents) and 5.55% (non-residents)
- 15-year term: 5.69% (residents) and 5.94% (non-residents)
What you need in order to qualify:
- An annual income of at least $25,000.
- A FICO score of at least 720.
- No more than two accounts reporting 30-day delinquencies during the previous two years.
- No delinquencies of 60 days or more during the previous two years.
- No charge-offs, repossessions, collection accounts, judgments, foreclosures, garnishments by credit providers or tax liens.
- No previous bankruptcies.
How it’s funded: The pilot program is currently funded through internal sources. Future program funding is expected to come from tax-exempt bond proceeds.
Where to learn more: Reset Loans
Massachusetts Educational Finance Authority (MEFA) offers the MEFA Educational Refinancing Loan to all U.S. Residents.
Eligibility: All U.S. permanent residents, regardless of state.
Refinance terms: MEFA offers only 15-year repayment terms.
Interest rate: With excellent credit, rates can be as low as 4.95% fixed and variable interest rates as low as 3.28% APR. Fixed Rates 4.95% - 6.85% APR; Variable Rates 3.28% - 6.12% APR.
What you need in order to qualify:
- Minimum 670 FICO score.
- At least $10,000 worth of loans you are seeking to refinance.
- No past default history on your student loans (more than 270 days behind on payments)
- No history of bankruptcy or foreclosure in the past 60 months.
How it’s funded: Taxable bonds.
Where to learn more: MEFA
Rhode Island: RISLA Refinance Loan
Eligibility: Borrowers may reside in any U.S. state.
Refinance terms: 5-, 10-, and 15-year loans. It should be noted that RISLA Refinance Loans do allow for twelve months of forbearance, but that this option pales in comparison to federal forbearance options that you will be giving up when you refinance federal student loans.
Interest rate: To get the best possible rates, you will need a cosigner. The lowest-possible rate for a 15-year term loan without a cosigner is 7.24%. That rate falls to 5.99% if you have a cosigner. You can also shave 0.25% off your rate if you agree to set up auto-pay. (See full rate details here)
What you need in order to qualify:
- If you and your cosigner reside at the same address, you must earn a combined income of at least $40,000 per year. If you live at different addresses, then either the borrower or the cosigner must make $40,000 individually.Where to learn more: RISLA
How it’s funded: Taxable bonds.
Kentucky: Advantage Education Loans
Eligibility: Only available to residents of Kentucky, Georgia, Mississippi, Missouri, Ohio, Virginia and West Virginia.
Refinance terms: 10, 15, 20, or 25 years.
Interest rate: They offer fixed rate loans. Rates range from 3.99% to 7.99%.
What you need in order to qualify:
- A minimum 670 FICO score for both the borrower and co-signer
- To get the best rates, you'll need a cosigner.
- At least $7,500 in loans to refinance.
Extra perk: Kentucky's refinance program will forgive your loan if you die or become disabled. Your cosigner will be relieved of his or her duty to pay as well.
How it’s funded: Excess agency assets, including governmental, fiduciary and proprietary funds. You can see a breakdown of the agency’s assets for 2015 here.
Where to learn more: KHESLC
Alaska: Alaska Refi
Alaska Refi will offer a fixed interest rate of 5.20% on 5-, 10- and 15-year loans. *Update: Alaska's program officially launched Aug. 1, 2016.
What you'll need in order to qualify:
- At least $7,500 in qualifying education loans in good standing
- Have a FICO score of 720 or higher, or a cosigner who meets the FICO score requirement
- Be employed or have other regular source of income
- Open only to Alaska residents
The program is brand new and funding is on a first come, first served basis. You can sign up here.
How it will be funded: The Alaska Student Loan Corporation
South Carolina: PAL ReFi
South Carolina offers low-rate refinance offers through the Palmetto Assistance Loan (PAL) ReFi program.
Eligibility: You must be a South Carolina resident.
Refinance terms: 5-, 10, or 15-year terms.
Interest rates: South Carolina's loan program is unique in that it offers just three different fixed rates for its loans. Those rates vary depending on which loan term you sign up for. For example, a five-year loan carries a 5% rate. A 10-year loan carries a 5.75% rate. A 15-year loan carries a 6.25% rate. You can take an additional 0.25% off that rate by enrolling in auto payments.
What you need in order to qualify:
- A FICO score of 675 or higher.
- You must be employed.
- A debt-to-income ratio of 30% or less.
- If you use a cosigner, he or she must be at least 24 years old.
Fine print: Borrowers with $20,000 or less in loans may only select a 5- or 10-year repayment term. Borrowers with more than $20,000 in loans may opt for the 15-year term.
How it’s funded: South Carolina Student Loan is a private non-profit that currently funds their PAL ReFi loans with their own assets. For now, that funding is more than sufficient. It is possible that they will look to bonds in the future, though.
Where to learn more: PAL ReFi
Connecticut: Refinance CT
Eligibility: Must be a Connecticut resident or have attended an eligible Connecticut college or university. Those refinancing a CHELSA loan do not need to be a Connecticut resident.
Refinance terms: 5-, 10- or 15-year terms.
Interest rate: This program offers only fixed rates ranging from 4.25-7%. They offer a 0.25% interest rate reduction for scheduling auto-payments.
- Monthly installment payments most be 43% or less of monthly gross income.
- Maximum amount you can refinance: $100,000
How it’s funded: An initial $5 million was provided through the assets of a subsidiary organization in much the same way as Kentucky’s program currently receives funding. When the initial funds are exhausted, this program will be funded by a mix of taxable and tax-exempt bonds, depending on market conditions.
Where to learn more: CHESLA.org
Minnesota: SELF Refi
Eligibility: Minnesota residents only.
Refinance terms: 5, 10, and 15-year loans on sums of $10,000 or more.
Interest rate: Fixed rate loans vary from 4.5% to 6.95%. Variable rate loans vary from 3.2% and 4.55% (Beware: variable interest rates are capped at a whopping 18%).
- A 720 credit score or higher, though you may still qualify if you have a co-signer.
- You need at least $10,000 in student loan debt to refinance.
How it’s funded: Funding comes from excess assets of the Minnesota Office of Higher Education. Some of those assets come from the interest paid on student loans, making at least a portion of the program self-funding. A full explanation of 2015 finances for the agency can be found here.
Where to learn more: SELF Refi
North Dakota: Deal One Loan
Eligibility: North Dakota residents who lived at a physical address in the state for the past six months.
Qualifications: The borrower is required to have a minimum FICO score of 700 or a cosigner with a minimum FICO score of 650 is necessary. Other factors will also be considered.
Refinance terms: Terms are based on how much you want to refinance.
Under $10,000: 10-year repayment term
$10,000 - $20,000: 15-year repayment term
$20,001-$30,000: $20-year repayment term
$30,0001 and up: 25-year repayment term.
Interest rate: Rates are determined by the term of your loan. The fixed rates APR is 4.33%. The variable interest rate APR is 2.15%, with a lifetime cap of 10%.
How it’s funded: The program is administered by Bank of North Dakota (BND), the only state-owned Bank in the country. All tax revenue is deposited at BND and is repurposed for a number of loan programs, including student loans.
Where to learn more: Deal One Loan
Maine's student loan refinance program is different from that of any other state. The Finance Authority of Maine backs loans issued by private lenders who offer student loan refinancing or consolidation. That way, consumers can pick from different local financial institutions competing against each other. The lenders are able to offer lower rates because of the insurance provided by the state agency.
Eligibility: Set by individual financial institutions, in collaboration with FAME.
Refinance terms: Set by individual financial institutions, in collaboration with FAME.
Interest rates: Set by individual financial institutions, with final approval from FAME. The entire point of this program is to keep rates competitive, so if you’re unhappy with the first rate you see, shop around.
- Minimum 680 FICO credit score for the borrower and cosigner (if applicable)
- $24,000 minimum annual income for borrower or cosigner (if applicable). If there is a cosigner on the loan, the cosigner must have a minimum of two years of work history.
- Minimum/maximum loan balance: $10,000/$240,000
How it’s funded: Maine runs this program similar to the way they run their commercial loan insurance program. In order for a loan to carry the insurance, guarantee fees must be paid. Financial institutions have the option to cover these fees themselves, or pass the cost on to consumers. Either way the fees get paid to the Finance Authority, and are then managed to build reserves in the event of a claim.
How to apply: Before taking out one of these loans, you will be required to take a ten-minute course on loan counseling online. A list of the current participating lenders includes: Infinity Federal Credit Union; Maine State Credit Union; Maine Savings Federal Credit Union; Seaboard Federal Credit Union; and University Credit Union. Apply at any lender’s website or visit the www.theloanforme.com for the links to the lenders.
New Jersey: NJCLASS Consolidation Loan
New Jersey currently allows borrowers to consolidate their loans through the NJCLASS Consolidation Loan. An NJCLASS loan will allow you to refinance two or more loans by bundling them into a single loan and restructuring your repayment period and your interest rate. The rate for your new loan will be determined by taking the weighted average of the interest rates for each individual loan.
Eligibility: NJCLASS consolidation loans are offered to New Jersey residents attending an eligible in-state or out-of-state school and out-of-state students attending a school in New Jersey.
- Must consolidate a minimum of $30,000.
- Must have 2 or more NJCLASS loans.
- NJCLASS Loans must be current.
- Borrowers must meet a minimum annual income requirement of $40,000.
- 25-year term: Total loan balance of $30,000 to $60,000
- 30-year term: Total loan balance of $60,000 or greater
Interest rate: The interest rate on a NJCLASS Consolidation loan will be determined by taking the weighted average of the interest rates for each individual loan minus 0.25%.
Other fees: There is a 1% administrative fee tacked on to all loans.
Some states are on the cusp of providing student loan refinancing options. These states may have passed the necessary legislation, but are still working on getting their programs ready to open to applicants. That means we aren't able to link to any specific websites for more information. But we've shared what we know so far:
The NJCLASS Refi+ Loan
In the Fall of 2016, New Jersey will launch the NJCLASS Refi+ loan. This program will allow borrowers to refinance even individual loans, removing the requirement for consolidation.
Eligibility: NJCLASS Refi+ will require applicants to either be state residents at the time of application, or to have been state residents when they originated the loan they are attempting to refinance.
- Must earn an annual income of $40,000
- Must have a minimum FICO score of 670
- Debt-to-income ratio must be less than 40%.
Interest rates: The NJCLASS Refi+ will determine your loan rate based on your credit score.
- Scores of 780+ will merit an interest rate of 4.90%.
- Scores of 720-779 will merit an interest rate of 5.70%.
- Scores of 670-719 will merit an interest rate of 6.90%.
- Those with scores below 670 may qualify with a parental cosigner.
How it’s funded: NJCLASS Refi+ will be funded through tax-exempt bonds.
Where to learn more: Hessa.org
Maryland (Montgomery County)
Montgomery County, Md. will establish the Montgomery County Student Loan Refinancing Authority by April 2017. Unfortunately, only residents of Montgomery County can apply.
Virginia lawmakers have proposed a student loan refinance program, but have yet to vote on the bill. To follow along as it moves through the state legislature bookmark the bill’s page.
Wisconsin’s SB 194, which would have established a State Loan Refinancing Authority to provide a means for borrowers to refinance student loans at lower rates. It was voted down in April 2016.
Nevada’s SB 215 also would have allowed for state refinancing of student loans. It was heard, but no action was taken.
Missouri’s HB 2432 has reached the house floor but has not yet been voted on. It isn't looking good.
California actually did pass legislation that would have opened the door for a student loan refinancing program. However, the program never received funding from the state, rendering it useless.