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Debt Consolidation vs. Bankruptcy – Which Option is Better?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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If you feel as if you are drowning in your debts, you may already be considering options for assistance, like one of several debt consolidation methods or filing for bankruptcy. The assistance you ultimately turn to will heavily depend on the severity of your financial situation. If you’re choosing between debt consolidation and bankruptcy, you are comparing options that vary greatly in cost, complexity and risk.

“Every possible option should be thoroughly researched, and no quick decisions should be made,” said Martin Lynch, director of education at Cambridge Credit Counseling in Agawam, Mass. “It usually takes a long time to get into debt trouble, and the process to unwind those debts should also involve patience and consideration before you commit to any option.”

What is debt consolidation and how does it work?

  • Personal loans
  • Balance transfer credit cards
  • Home equity loans
  • Home equity lines of credit

When you consolidate debts, you essentially roll multiple debts into one. A new loan or line of credit is used to pay off previous debts, leaving you to manage one monthly payment. Popular debt consolidation products include personal loans, balance transfer credit cards, home equity loans and home equity lines of credit.

Ideally, the consolidation loan will have more favorable terms than existing debts, like a lower interest rate or monthly payment. In addition, consolidating debts could help reduce the number of bills a borrower is responsible for keeping up with.

What is bankruptcy and how does it work?

  • Chapter 7
  • Chapter 13

Bankruptcy is a federal protection that helps individuals and businesses who cannot afford to repay their debts. Bankruptcy can eliminate consumer debts and may help debtors repay what they can through court-approved debt repayment plans. The law allows individuals to file for either Chapter 7 (liquidation) or Chapter 13 (repayment) bankruptcy.

Chapter 7 bankruptcy is referred to as liquidation bankruptcy because a borrower may have to sell some of their assets to pay off their debts. In Chapter 7, any of the borrower’s assets that are not exempt from sale under law may be sold by a court-appointed trustee or turned over to creditors to settle debts. Most other debts are discharged, with some exceptions (more on that in a minute).

In a Chapter 13 filing, a court approves a repayment plan that lets the borrower repay their creditors over three to five years. Any remaining amount owed on the debts will be discharged after all payments are made under the repayment plan.

Some debts, like most student loans, most tax obligations, child support, alimony and court and criminal fines are not eligible for discharge in bankruptcy.

Comparing debt consolidation and bankruptcy

Here’s a comparison of debt consolidation and bankruptcy.

Qualifications

Debt consolidation

  • A FICO credit score of at least 600
  • A low debt to income ratio below 40%
  • No recent bankruptcies

Bankruptcy

Chapter 7
You must complete credit counseling within the six months prior to filing for bankruptcy, as well as a post-bankruptcy debtor education course for debts to be discharged.

You must also pass a “means test” for eligibility:

  • Your monthly income must be below the median state income, based on family size.
  • Your disposable income isn’t enough to satisfy your debt obligations.

Chapter 13
You must complete credit counseling within the six months prior to filing for bankruptcy, as well as a post-bankruptcy debtor education course for debts to be discharged.

  • Secured debt (e.g. mortgages and auto loans) must not be worth more than $1,184,200 total
  • Unsecured debt (e.g. credit cards and medical bills) must not exceed $394,725

What debts qualify?

Debt consolidation

Existing debts such as:

  • Credit cards
  • Medical bills
  • Utility bills
  • Payday loans
  • Student loans
  • Taxes
  • Bills in collection

Bankruptcy

Chapter 7
A bankruptcy trustee or bankruptcy court liquidates nonexempt assets sufficient to repay creditors.

Chapter 7 bankruptcy may result in discharge of the following existing debt:

  • Credit cards
  • Personal loans
  • Medical bills
  • Utility bills
  • Payday loans
  • Bills in collection
  • Obligations under leases and contracts
  • Promissory notes

Certain items do not count toward your assets, including:

  • household goods
  • wedding rings
  • money in retirement accounts
  • medical supplies

Some assets are exempt under federal and state law, and exemptions vary by state. Federal bankruptcy law allows you to keep up to $15,000 of home equity and $2,400 of vehicle equity, so your home, vehicle and other assets could be protected under state or federal exemptions. But exemptions aren’t automatic — talk to a bankruptcy attorney in your area to understand what you’re at risk of losing.

Chapter 13
You can file for Chapter 13 if you have less than $394,725 in unsecured debts like credit cards and personal loans and less than $1,184,200 in secured debts like a mortgage or auto loan. Filing Chapter 13 may stop home foreclosures, though you must make timely mortgage payments during the Chapter 13 plan. You can also prevent repossession of some assets by restructuring secured-debt payments within the Chapter 13 repayment plan.

Chapter 13 bankruptcy may result in discharge of the following existing debt:

  • Credit cards
  • Medical bills
  • Utility bills
  • Payday loans
  • Student loans
  • Taxes
  • Bills in collection

A Chapter 13 bankruptcy discharge does not eliminate long-term obligations like a home mortgage. You will continue to pay the remainder of the obligation after the repayment plan ends.

Effect on credit score

Debt consolidation

You may see your credit score drop slightly, because applying for new credit generates a hard inquiry on your credit report and can shave a few points off your score.

However, you can expect your credit score to improve as you make on-time payments on your new loan.

Your credit score might actually improve in the short term if you pay off revolving debts (like credit cards) but keep the accounts open. Closing accounts lowers your credit limit, raising your credit utilization ratio — a major factor in credit scores — and in turn lowering your credit score. Not paying off debt or adding additional debt can also impact you negatively.

Bankruptcy

A study by LendingTree, the parent company of MagnifyMoney, found 43% of people with a bankruptcy on their credit file have a credit score of 640 or higher within a year of the bankruptcy, and that figure goes up to 65% two years post-filing — but you should expect your credit score to drop after filing for bankruptcy.

Bankruptcy is considered a very negative event and will cause serious damage to a filer’s credit score for as long as it remains on the credit report.

A Chapter 7 filing stays on your credit report for 10 years, while a Chapter 13 filing should fall off your report after 7 years.

The older negative information is, the less impact it will have on your credit score.

You may see accounts included in the bankruptcy filing removed from the report before the bankruptcy is removed. Any individual account that was included in the bankruptcy will be removed 7 years from its delinquency date.

The amount your score falls will vary depending on how many accounts are part of the bankruptcy and whether they were delinquent or charged off. Your credit score prior to bankruptcy also plays a factor in this — borrowers with higher credit scores prior to filing for bankruptcy can expect to see larger drops in credit score.

How it appears on your credit report

Debt consolidation

Balances on consolidated debts will decrease or be marked as paid off, and a new loan will be added to your credit report.

Bankruptcy

Chapter 7
Bankruptcy will drop off your credit report 10 years from the filing date. Accounts included in the bankruptcy will be removed 7 years from their delinquency dates.

Chapter 13
Bankruptcy will drop off your credit report after 7 years from the filing date. Accounts included in the bankruptcy will be removed 7 years from their delinquency dates.

Length of process

Debt consolidation

The time frame varies from several months to several years, based on the term of the debt consolidation loan.

Bankruptcy

Chapter 7
The entire process may take up to six months to complete.

Chapter 13
The legal process may take several months; the repayment period will last three to five years.

Cost

Debt consolidation

You will have to pay interest on your new loan, and rates vary widely by loan type.

Some personal loans may charge fees such as:

  • Loan origination fee
  • Prepayment fee
  • Loan credit insurance

Credit card companies may charge a fee to make a balance transfer between credit cards. A 3% balance transfer fee is common. With a balance transfer credit card, you may be able to transfer credit card debt to a card with a 0% APR on balance transfers for a limited time, but if you don’t pay off the balance during the 0% APR intro period, your debt may begin to accrue interest.

There may be fees associated with a HELOC or home equity loan such as:

  • An appraisal fee, to gauge the current value of the property
  • Application costs
  • Processing fees
  • Miscellaneous lender fees
  • Cancellation fee
  • Inactivity fee

Bankruptcy

Chapter 7

  • Filing fee: $245
  • Administrative fee: $75
  • Trustee fee: $15
  • Attorney: varies
  • Pre- and post-bankruptcy credit counseling/debtor education courses: about $50-$100 each

Chapter 13

  • Filing fee: $235
  • Administrative fee: $75
  • Convert Chapter 13 to Chapter 7: $25
  • Attorney: varies
  • Pre- and post-bankruptcy credit counseling/debtor education courses: about $50-$100 each

Generally, interest is not paid on unsecured debts. Interest on secured debts are paid through the Chapter 13 plan. How bankruptcy courts determine that rate varies by state, but the Supreme Court case Till v. SCS Credit Corp. provided guidance that the rate can be calculated as the prime rate plus 1.5%.

Tax consequences

Debt consolidation

None.

Bankruptcy

If you are owed a tax refund, the money may be delayed or the funds may be turned over to trustee.

Discharged debt is taxable as income, so if you have debts discharged you may need to set aside funds to pay the tax when the time comes.

Benefits

Debt consolidation

  • Avoid severe credit damage.
  • Improve your credit score over time.
  • There’s no risk of losing personal property with a personal loan or balance transfer credit card.
  • It may be easier to qualify for than bankruptcy.

Bankruptcy

Chapter 7

  • You can have most unsecured and secured debts discharged quickly, within 4 to 6 months.
  • You may not have to pay back the entire amount of what you owe.
  • By law, collections efforts have to stop.
  • Under state and federal law, you may be allowed to keep certain exempt property.

Chapter 13

  • You can pay back some of what you owe to creditors over 3 to 5 years.
  • Your remaining debts are discharged after completing the 3- to 5-year repayment plan.
  • You may not have to pay back the entire amount of what you owe.
  • Make one installment payment to a trustee, instead of managing multiple debts.
  • Save property like a house headed to foreclosure or vehicle about to be repossessed.
  • Save assets that would otherwise be sold in a Chapter 7 filing.
  • It may allow you to catch up on delinquent mortgage payments over time.
  • By law, collections efforts have to stop.
  • It protects cosigners from liability on consumer debts.
  • It may lower the monthly payment on secured debts.

Risks

Debt consolidation

Bankruptcy

Chapter 7

  • Because of the credit score damage caused by bankruptcy, you risk not being able to qualify for credit when you need it, particularly in the first few years after declaring bankruptcy.
  • You risk losing assets not protected by exemption (consult with an expert about what’s applicable for exemption in your state).
  • You must wait 2 years to take out an FHA mortgage and 4 years for a conventional mortgage.
  • You may face issues renewing professional licensing.
  • Cosigners are not protected in a Chapter 7 filing, so creditors can still go after them and can sue for payment.

Chapter 13

  • Because of the credit score damage caused by bankruptcy, you risk not being able to qualify for credit when you need it, particularly in the first few years after declaring bankruptcy.
  • You must wait 2 years to take out an FHA mortgage and 4 years for a conventional mortgage.
  • You may face issues renewing professional licensing.

Life after debt consolidation or bankruptcy

Be prepared to make some life changes after consolidating your debts or declaring bankruptcy.

Debt consolidation

After you’ve consolidated your debt, your focus should be on paying it off. If you’ve consolidated credit card debts, try to not rack up debt again on the credit cards.

You can build your credit score by adding positive information to your credit report. Paying your bills in full and on time can help both keep your credit utilization low and establish a record of on-time payment history. Together, those factors comprise 65% of your FICO score. Your utilization is the overall percentage you use of your available revolving credit, and experts recommend keeping that figure below 30%. Your on-time payment history makes up 35% of your credit report and demonstrates you can manage your debt payments.

Making and following a budget can help prevent you from piling up more debt. It would be wise to start saving some amount of money in an emergency fund, as it may keep you from turning to high-cost debt when you encounter unexpected costs. Experts recommend you save enough to cover three to six months’ worth of fixed expenses.

Bankruptcy

Having the bankruptcy on your credit report will weigh down your credit score for a while, but the process also gives you a fresh start.

“Filing for bankruptcy can devastate a score, but that’s not the focus of the consumer’s decision at that point — discharging debt is,” said Lynch. He adds most filers have at least some credit offers soon after filing, although they may not receive the best rates.

You can rebuild your score over time by adding positive information to your credit history, like on-time payments, and using very little of your available credit. If you need an idea of where and how to start rebuilding, LendingTree has tips on rebuilding your credit after filing bankruptcy, here.

The same advice as debt consolidation stands as far as managing your cash: You should create and follow a budget, as well as establish an emergency fund so that you don’t find yourself in a similar situation a few years down the road.

How to decide which option is better

When debt consolidation makes sense over bankruptcy

Debt consolidation may be a more attractive option compared to bankruptcy if you have a reasonably good credit score and can pinpoint the root of why you got into debt in the first place. If it was a one-off incident like a job loss or medical issue that forced you to rack up debt, or you’ve recently kicked poor spending habits that got you into debt, you may be able to use a debt consolidation loan to finally get back on track.

A good credit score will help you qualify for a debt consolidation loan at a lower interest rate, making it less expensive overall for you to pay off your debts. The better your credit score, the more debt consolidation options you have.

But if you haven’t resolved the issue that got you into debt in the first place, debt consolidation can be risky.

When bankruptcy makes sense over debt consolidation

Lynch recommended speaking with a credit counselor or a bankruptcy attorney to evaluate your options if the amount of unsecured debt you’re responsible for exceeds about 20% of your income. But the decision to file bankruptcy ultimately comes down to an individual’s capacity for disciplined repayment.

“The best candidates for bankruptcy are those consumers who know what the consequences will be, know what property they may stand to lose — in the case of a Chapter 7 filer — and have done their best to determine what the 3 to 5 years of repayment would be like if they were to file Chapter 13,” said Lynch.

Consider your debts

Jeffrey Arevalo, an financial wellness expert at Greenpath Financial Wellness, recommended you consider your income, the types of debt you have and your assets in deciding if bankruptcy is right for you — and, if so, which type of bankruptcy you would need to file.

According to Arevalo, you should consider whether bankruptcy can help you with the kind of debt you’re dealing with in the first place; there are some debts, including student loans, child support, alimony and tax debts, that won’t be eligible for discharge in either a Chapter 7 or Chapter 13 filing.

Consider your assets

The assets you own may affect whether or not you opt for bankruptcy over debt consolidation, too. You may risk losing certain assets like secondary residence properties, valuable vehicles and other assets that aren’t exempt for sale under applicable state and federal law to pay off your debts if you file Chapter 7 bankruptcy. The rules vary by state, so check first to see what you’d risk losing if you file for Chapter 7.

On the other hand, a benefit of filing for Chapter 13 bankruptcy is that it gives you an opportunity to save your home from foreclosure or a car from repossession, if that’s a risk you’re facing.

Eligibility

Finally, filing would depend on whether or not you are eligible for bankruptcy.

“Based on bankruptcy guidelines in your state, if you make too much or too little of income it will determine whether or not you have the ability or inability to repay your debt,” said Arevalo.

To be eligible for Chapter 13 bankruptcy you must first:

  1. Have regular income
  2. The amount of secured debt (like a mortgage or auto loan) cannot be more than $1,184,200, and the amount of unsecured debt (like medical bills or credit card debt) cannot exceed $394,725

To be eligible for Chapter 7 bankruptcy you must prove you cannot afford your debt payments. To do so you must:

  1. Prove your monthly income is less than the median income in your state for your family size
  2. If you don’t pass the first requirement, the court will use another complex calculation to see whether your disposable income is enough to satisfy your debt obligations

Student loans

Filing for either type of bankruptcy won’t result in your student loans being discharged in most cases, according to the experts.

“Contrary to popular belief, both federal and private student loans can be discharged in bankruptcy, but the standards applied most often — the so-called ‘Brunner test’ — are difficult for many people to satisfy,” said Lynch.

To have student loans discharged, you have to file an adversary proceeding, a lawsuit filed in bankruptcy court. That’s when you have to pass what’s commonly referred to as the Brunner Test, meaning you must prove repayment would “impose undue hardship on you and your dependents.”

The following factors determine undue hardship:

  • Repaying the loan would not allow you to maintain a minimal living standard.
  • Evidence shows that the hardship will likely continue throughout much of the loan’s repayment period.
  • Good faith efforts were made towards loan payment prior to the bankruptcy filing.

The chances of any individual borrower passing the test are slim, according to John Colwell, president of the National Association of Consumer Bankruptcy Attorneys.

“You can sue and try to prove a hardship discharge in bankruptcy but the burden of proof on the debtor is very high,” Colwell said. On top of that, Colwell told MagnifyMoney, the process is an additional expense for an already cash-strapped debtor, who would have to pay a lawyer to file the lawsuit and combat an aggressive opposition from the student loan companies.

In February 2018, the U.S. Department of Education announced it would review the undue hardship definition, but, according to Lynch, “it’s even debatable whether that would have any real effect, as actual changes would have to come via Congress.”

Statute of limitations
Borrowers who have private student loans should remember private loans are generally subject to a state’s statute of limitations, Lynch added.

“If the statute has expired, there may be no need to include the loans in a bankruptcy filing,” said Lynch. He advised anyone considering bankruptcy with private loans to first speak with an experienced bankruptcy attorney who has had success with discharging student loans.

Repayment options
Student loans likely won’t be discharged in either type of bankruptcy. However, if you opt to file for Chapter 13 bankruptcy, the repayment plan may reduce your payment to something more manageable for your budget — or you may have no payment at all for three to five years as you pay down your debts.

If you have federal student loans and are struggling to make payments, it may be beneficial to contact your loan servicer and ask about forbearance, deferment or your eligibility for one of several repayment plans. Some private student loan companies offer similar options.

The bottom line

Understanding your mix of assets and and passing the eligibility test doesn’t necessarily mean bankruptcy is the best option for you over debt consolidation. And owning a house or having the credit score to qualify for a balance transfer credit card or personal loan doesn’t mean you should consolidate your debt.

If you understand the differences but are struggling to make up your mind or having trouble understanding your options, you should contact a professional. Lynch recommended speaking to multiple financial professionals, including a credit counselor or bankruptcy attorney, and weighing their recommendations before making a final decision.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Couponing 101: How to Get Started So You Can Eliminate Debt

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Think couponing is a waste of time? Think again. Taking a moment to clip a coupon or ask for a deal can go a long way toward getting out of debt.

The Federal Reserve’s most recent Survey of Consumer Finances shows that 77% of Americans have some form of debt, with credit card debt being the most common. And, according to financial attorney Leslie H. Tayne, founder of Tayne Law Group P.C., there is no downward trend in sight. With the cost of goods on the rise, and income levels not keeping pace, the Melville, N.Y., lawyer says that people become trapped in the paycheck to paycheck cycle. Their debt severely limits their opportunities — both financially and in life.

Lauren Greutman, Syracuse, N.Y.-based consumer savings expert and founder of That Lady Media, once knew that struggle. With $40,000 in debt and an underwater mortgage, she turned to couponing to slash her grocery bill from $2,000 to $200 per month, allocating those savings to her debt. She coupled her couponing strategies with some side hustles and eliminated that burden in three years.

“By couponing, you can give yourself a $5,000-a-year raise that you can use to pay down debt or put towards your other financial goals,” Greutman said.

Here’s how to get your start.

How to start couponing

Greutman said that it’s important for you to first learn when to use a coupon and when not to. For example, she pointed out, buying a generic good may still be cheaper than buying a name brand good with a coupon. She adds that you should hold on to coupons until the items are on sale to increase your savings. Consumer.gov takes it a step further and advises you to avoid buying things just because you have a coupon. It’s not a good deal if you don’t want or need the item.

Next, Greutman encourages you to learn the couponing policies of your favorite stores. Do they let you double up on coupons? At one point, she was getting $500 worth of groceries for $40 by taking advantage of triple coupon sales that her preferred grocer ran once per month.

Greutman’s go-to strategy to get coupons? She emails her favorite manufacturers directly, who, nine times out of 10, send her free products or a high-value coupon. Tayne concurs and often asks companies what deals they have running. If it’s quick and simple, she “loves the idea of trying to pay less.” Consumer.gov says that coupons can also be found in newspapers, magazines, on manufacturer’s websites, or on websites specifically dedicated to coupons.

Couponing strategies from the pros

Greutman offers the following pro couponing tips:

  • Stack savings by pairing a store coupon with a manufacturer’s coupon to purchase a sale item that has a mail-in rebate.
  • Learn the sales cycles of your favorite brands (competitors will never have their goods on sale at the same time).
  • Meal plan around deals to feed your family for super cheap.

Tayne also likes the planning aspect of couponing. She said that the process helps you stick to a budget because you’re thinking about your purchases before you get to the store. This can prevent overspending and taking on additional debt. The Consumer Financial Protection Bureau (CFPB) encourages you to make frugal shopping a family endeavor and teach your children about the value of using coupons early on.

On her website, Greutman urges you to realize that couponing is a skill that takes time to hone. She encourages you to not give up just because you’re not scoring the mega deals right out of the gate. With patience, couponing, and meal planning, the whole frugal shopping experience can eventually become automatic to you.

A word of caution on couponing

On couponing, Greutman said that “short term sacrifice will give you long term gain.” However, both she and Tayne agree that extreme couponing may not be cost effective due to the time commitment. If the process is quick and simple, it absolutely makes sense to try and pay less, Tayne said. But, she cautioned, “don’t let [couponing] take over your life and impact your ability to earn money, which may be more valuable than couponing.”

Once Greutman mastered couponing, she started her business to help other women get out of debt using the tools that she learned. By doing this, she increased her household’s income, further hastening the process of becoming debt free. The moral? Your best way to get out of debt appears to be a two-pronged approach of saving money (through coupons or other means) and earning more of it.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Laura Gariepy |

Laura Gariepy is a writer at MagnifyMoney. You can email Laura here

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7 Best Options to Refinance Student Loans – Get Your Lowest Rate

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Updated: December 2, 2018

Are you tired of paying a high interest rate on your student loan debt? You may be looking for ways to refinance your student loans at a lower interest rate, but don’t know where to turn. We have created the most complete list of lenders currently willing to refinance student loan debt. We recommend you start here and check rates from the top 7 national lenders offering the best student loan refinance products. All of these lenders (except Discover) also allow you to check your rate without impacting your score (using a soft credit pull), and offer the best rates of 2018:

LenderTransparency ScoreMax TermFixed APRVariable APRMax Loan Amount 
SoFiA+

20


Years

3.90% - 8.02%


Fixed Rate*

2.56% - 7.30%


Variable Rate*

No Max


Undergrad/Grad
Max Loan
Learn more Secured

on SoFi’s secure website

EarnestA+

20


Years

3.89% - 7.89%


Fixed Rate

2.47% - 6.97%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured

on Earnest’s secure website

CommonBondA+

20


Years

3.67% - 7.25%


Fixed Rate

2.70% - 7.44%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured

on CommonBond’s secure website

LendKeyA+

20


Years

5.10% - 8.93%


Fixed Rate

2.68% - 8.96%


Variable Rate

$125k / $175k


Undergrad/Grad
Max Loan
Learn more Secured

on LendKey’s secure website

Laurel Road BankA+

20


Years

3.50% - 7.02%


Fixed Rate

3.23% - 6.65%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured

on Laurel Road Bank’s secure website

Citizens BankA+

20


Years

3.90% - 9.99%


Fixed Rate

3.00% - 9.74%


Variable Rate

$90k / $350k


Undergraduate /
Graduate
Learn more Secured

on Citizens Bank (RI)’s secure website

Discover Student LoansA+

20


Years

5.74% - 8.49%


Fixed Rate

4.99% - 7.99%


Variable Rate

$150k


Undergraduate /
Graduate
Learn more Secured

on Discover Bank’s secure website

You should always shop around for the best rate. Don’t worry about the impact on your credit score of applying to multiple lenders: so long as you complete all of your applications within 14 days, it will only count as one inquiry on your credit score.

We have also created:

But before you refinance, read on to see if you are ready to refinance your student loans.

Can I get approved?

Loan approval rules vary by lender. However, all of the lenders will want:

  • Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loans and all of your other expenses.
  • Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.
LenderMinimum credit scoreEligible degreesEligible loansAnnual income
requirements
Employment
requirement
 
SoFi

Good or Excellent
score needed

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured

on SoFi’s secure website

Earnest

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured

on Earnest’s secure website

CommonBond

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured

on CommonBond’s secure website

LendKey

680

Undergraduate
& Graduate

Private & Federal

$24K

Yes

Learn more Secured

on LendKey’s secure website

Laurel Road Bank

Not published

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured

on Laurel Road Bank’s secure website

Citizens Bank

680

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

$24K

Yes

Learn more Secured

on Citizens Bank (RI)’s secure website

Discover Student Loans

Not published

Undergraduate
& Graduate

Private & Federal

None

Yes

Learn more Secured

on Discover Bank’s secure website

Diving Deeper: The best places to consider a refinance

If you go to other sites they may claim to compare several student loan offers in one step. Just beware that they might only show you deals that pay them a referral fee, so you could miss out on lenders ready to give you better terms. Below is what we believe is the most comprehensive list of current student loan refinancing lenders.

You should take the time to shop around. FICO says there is little to no impact on your credit score for rate shopping as many providers as you’d like in a single shopping period (which can be between 14-30 days, depending upon the version of FICO). So set aside a day and apply to as many as you feel comfortable with to get a sense of who is ready to give you the best terms.

Here are more details on the 7 lenders offering the lowest interest rates:

1. SoFi

LEARN MORE Secured

on SoFi’s secure website

Read Full Review

SoFi : Variable rates from 2.56% and Fixed Rates from 3.90% (with AutoPay)*

SoFiwas one of the first lenders to start offering student loan refinancing products. More MagnifyMoney readers have chosen SoFi than any other lender. The only requirement is that you graduated from a Title IV school. In order to qualify, you need to have a degree, a good job and good income.

Pros Pros

  • Borrowers can refinance private, federal and Parent PLUS loans together: Through SoFi, borrowers have the ability to combine all of their student loans (private, federal and Parent PLUS) when refinancing. Along with the ability to refinance Parent PLUS loans, parents can also transfer the PLUS loans into their child’s name.
  • Access to career coaches: SoFi offers their borrowers access to their Career Advisory Group who work one-on-one with borrowers to help plan their career paths and futures.
  • Unemployment protection: SoFi offers some help if you lose your job. During the period of unemployment they will pause your payments (for up to 12 months) and work with you to find a new job. However, just remember that any unemployment protection offered by SoFi would be weaker than the income-driven repayment options of federal loans.

Cons Cons

  • No cosigner release: While they offer you the opportunity to refinance with a cosigner, it is important to know that SoFi does not offer borrowers the opportunity to release a cosigner later on down the road.
  • You lose certain protections if you refinance a federal loan: This con is not unique to SoFi (and you will find it with all other private lenders). Federal loans come with certain protections, including robust income-driven payment protection options. You will forfeit those protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

SoFi is really the original student loan refinance company, and is now certainly the largest. SoFi has consistently offered low interest rates and has received good reviews for service. In addition, SoFi invests heavily in building a “community” – which means you can start to get other benefits once you are a SoFi member.

SoFi has taken a radical new approach when it comes to the online finance industry, not only with student loans but in the personal loan, wealth management and mortgage markets as well. With their career development programs and networking events, SoFi shows that they have a lot to offer, not only in the lending space but in other aspects of their customers lives as well.

2. Earnest

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Earnest : Variable Rates from 2.47% and Fixed Rates from 3.89% (with AutoPay)

Earnest focuses on lending to borrowers who show promise of being financially responsible borrowers. Because of this, they offer merit-based loans versus credit-based ones. 

Pros Pros

  • Flexible repayment options: Earnest offers some of the most flexible options when it comes to repayment. They allow you to choose any term length between 5-20 years. You can choose your own monthly payment, based upon what you can afford (to the penny). Earnest also offers bi-weekly payments and “skip a payment” if you run into difficulty.
  • Ability to switch between variable and fixed rates: With Earnest, you can switch between fixed and variable rates throughout the life of your loan. You can do that one time every six months until the loan is paid off. That means you can take advantage of the low variable interest rates now, and then lock in a higher fixed rate later.
  • Loans serviced in-house: Earnest is one of just a few lenders that provides in-house loan servicing versus using a third-party servicer.

Cons Cons

  • Cannot apply with a cosigner: Unlike many of the other lenders, Earnest does not allow borrowers to apply for student loan refinancing with a cosigner.
  • No option to transfer Parent PLUS loans to Child: If you are a parent that is looking to refinance your Parent PLUS loan into your child’s name, it is important to note that this cannot be done through refinancing with Earnest.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

Earnest, who was recently acquired by Navient, is making a name for themselves within the student refinancing space. With their flexible repayment options and low rates, they are definitely an option worth exploring.

3. CommonBond

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CommonBond : Variable Rates from 2.70% and Fixed Rates from 3.67% (with AutoPay)

CommonBond started out lending exclusively to graduate students. They initially targeted doctors with more than $100,000 of debt. Over time, CommonBond has expanded and now offers student loan refinancing options to graduates of almost any university (graduate and undergraduate).

Pros Pros

  • Hybrid loan option: CommonBond offers a unique “Hybrid” rate option in which rates are fixed for five years and then become variable for five years. This option can be a good choice for borrowers who intend to make extra payments and plan on paying off their student loans within the first five years. If you can a better interest rate on the Hybrid loan than the Fixed-rate option, you may end up paying less over the life of the loan.
  • Social promise: CommonBond will fund the education of someone in need in an emerging market for every loan that closes. So not only will you save money, but someone in need will get access to an education.
  • “CommonBridge” unemployment protection program: CommonBond is here to help if you lose your job. Similar to SoFi, they will pause your payments and assist you in finding a new job.

Cons Cons

  • Does not offer refinancing in the following states: Idaho, Louisiana, Mississippi, Nevada, South Dakota and Vermont.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

CommonBond not only offers low rates but is also making a social impact along the way. Consider checking out everything that CommonBond has to offer in term of student loan refinancing.

4. LendKey

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LendKey : Variable Rates from 2.68% and Fixed Rates from 5.10% (with AutoPay)

LendKey works with community banks and credit unions across the country. Although you apply with LendKey, your loan will be with a community bank. Over the past year, LendKey has become increasingly competitive on pricing, and frequently has a better rate than some of the more famous marketplace lenders.

Pros Pros

  • Opportunity to work with local banks and credit unions: LendKey is a platform of community banks and credit unions, which are known for providing a more personalized customer experience and competitive interest rates.
  • Offers interest-only payment repayment: Many of the lenders on LendKey offer the option to make interest-only payments for the first four years of repayment.

Cons Cons

  • Rates can vary depending on where you live: The rate that is advertised on LendKey is the lowest possible rate among all of its lenders, and some of these lenders are only available to residents of specific areas. So even if you have an excellent credit report, there is still a possibility that you will not receive the lowest rate, depending on geographic location.
  • No Parent PLUS refinancing available: Unlike several of the other student loan refinancing companies, borrowers do not have the ability to refinance Parent PLUS loans with LendKey.
  • You lose certain protections if you refinance a federal loan: As when refinancing federal loans with any private lender, you will give up your federal protections if you refinance your federal loan to a private one.

Bottom line

Bottom line

LendKey is a good option to keep in mind if you are looking for an alternative to big bank lending. If you prefer working with a credit union or community bank, LendKey may be the route to uncovering your best offer.

5. Laurel Road Bank

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Laurel Road Bank : Variable Rates from 3.23% and Fixed Rates from 3.50% (with AutoPay)

Laurel Road Bank offers a highly competitive product when it comes to student loan refinancing.

Pros Pros

  • Forgiveness in the case of death or disability: They may forgive the total student loan amount owed if the borrower dies before paying off their debt. In the case that the borrower suffers a permanent disability that results in a significant reduction to their income,Laurel Road Bank may forgive some, if not all of the amount owed.
  • Offers good perks for Residents and Fellows: Laurel Road Bank allows medical and dental students to pay only $100 per month throughout their residency or fellowship and up to six months after training. It is important for borrowers to keep in mind that the interest that accrues during this time will be added on to the total loan balance.

Cons Cons

  • Higher late fees: While many lenders charge late fees,Laurel Road Bank’s late fee can be slightly steeper than most at 5% or $28 (whichever is less) for a payment that is over 15 days late.
  • You lose certain protections if you refinance a federal loan: While not specific to Laurel Road Bank, it is important to keep in mind that you will give up certain protections when refinancing a federal loan with any private lender.

Bottom line

Bottom line

As a lender,Laurel Road Bank prides itself on offering personalized service while leveraging technology to make the student loan refinancing process a quick and simple one. Consider checking out their low-rate student loan refinancing product, which is offered in all 50 states.

6. Citizens Bank

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Citizens Bank (RI) : Variable Rates from 3.00% and Fixed Rates from 3.90% (with AutoPay)

Citizens Bank offers student loan refinancing for both private and federal loans through its Education Refinance Loan.

Pros Pros

No degree is required to refinance: If you are a borrower who did not graduate, with Citizens Bank, you are still eligible to refinance the loans that you accumulated over the period you did attend. In order to do so, borrowers much no longer be enrolled in school.

Loyalty discount: Citizens Bank offers a 0.25% discount if you already have an account with Citizens.

Cons Cons

Cannot transfer Parent PLUS loans to Child: If you are looking to refinance your Parent PLUS loan into your child’s name, this cannot be done through Citizens Bank.

You lose certain protections if you refinance a federal loan: Any time that you refinance a federal loan to a private loan, you will give up the protections, forgiveness programs and repayment plans that come with the federal loan.

Bottom line

Bottom line

The Education Refinance Loan offered by Citizens Bank is a good one to consider, especially if you are looking to stick with a traditional banking option. Consider looking into the competitive rates that Citizens Bank has to offer.

7. Discover

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Discover Student Loans : Variable Rates from 4.99% and Fixed Rates from 5.74% (with AutoPay)

Discover, with an array of competitive financial products, offers student loan refinancing for both private and federal loans through their private consolidation loan product.

Pros Pros

  • In-house loan servicing: When refinancing with Discover, they service their loans in-house versus using a third-party servicer.
  • Offer a variety of deferment options: Discover offers four different deferment options for borrowers. If you decide to go back to school, you may be eligible for in-school deferment as long as you are enrolled for at least half-time. In addition to in-school deferment, Discover offers deferment to borrowers on active military duty (up to 3 years), in eligible public service careers (up to 3 years) and those in a health professions residency program (up to 5 years).

Cons Cons

  • Performs a hard credit pull: While most lenders do a soft credit check, Discover does perform a hard pull on your credit.
  • No Parent PLUS refinancing available: Discover does not offer borrowers the option of refinancing their Parent PLUS loans.
  • You lose certain protections if you refinance a federal loan: Be careful when deciding to refinance your federal student loans because when doing so, you will lose access federal protections, forgiveness programs and repayment plans.

Bottom line

Bottom line

If you’re looking for a well-established bank to refinance your student loans, Discover may be the way to go. Just keep in mind that if you apply for a student loan refinance with Discover, they will do a hard pull on your credit.

 

Additional Student Loan Refinance Companies

In addition to the Top 7, there are many more lenders offering to refinance student loans. Below is a listing of all providers we have found so far. This list includes credit unions that may have limited membership. We will continue to update this list as we find more lenders:

Traditional Banks

  • First Republic Eagle Gold. The interest rates are great, but this option is not for everyone. Fixed rates range from 1.95% – 4.45% APR. You need to visit a branch and open a checking account (which has a $3,500 minimum balance to avoid fees). Branches are located in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland (Oregon), Boston, Palm Beach (Florida), Greenwich or New York City. Loans must be $60,000 – $300,000. First Republic wants to recruit their future high net worth clients with this product.
  • Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 4.74% and fixed rates starting at 5.24%. You would likely get much lower interest rates from some of the new Silicon Valley lenders or the credit unions.

Credit Unions

  • Alliant Credit Union: Anyone can join this credit union. Interest rates start as low as 3.75% APR. You can borrow up to $100,000 for up to 25 years.
  • Eastman Credit Union: Credit union membership is restricted (see eligibility here). Fixed rates start at 6.50% and go up to 8% APR.
  • Navy Federal Credit Union: This credit union offers limited membership. For men and women who serve (or have served), the credit union can offer excellent rates and specialized underwriting. Variable interest rates start at 4.07% and fixed rates start at 4.70%.
  • Thrivent: Partnered with Thrivent Federal Credit Union, Thrivent Student Loan Resources offers variable rates starting at 4.13% APR and fixed rates starting at 3.99% APR. It is important to note that in order to qualify for refinancing through Thrivent, you must be a member of the Thrivent Federal Credit Union. If not already a member, borrowers can apply for membership during the student refinance application process.
  • UW Credit Union: This credit union has limited membership (you can find out who can join here, but you had better be in Wisconsin). You can borrow from $5,000 to $150,000 and rates start as low as 4.29% (variable) and 3.99% APR (fixed).

Online Lending Institutions

  • Education Loan Finance:This is a student loan refinancing option that is offered through SouthEast Bank. They have competitive rates with variable rates ranging from 2.80% – 6.01% APR and fixed rates ranging from 3.39% – 6.69% APR.
  • EdVest: This company is the non-profit student loan program of the state of New Hampshire which has become available more broadly. Rates are very competitive, ranging from 4.53% – 7.20% (fixed) and 4.58% – 7.25% APR (variable).
  • IHelp : This service will find a community bank. Unfortunately, these community banks don’t have the best interest rates. Fixed rates range from 4.00% to 8.00% APR (for loans up to 15 years). If you want to get a loan from a community bank or credit union, we recommend trying LendKey instead.
  • Purefy: Purefy lenders offer variable rates ranging from 2.82%-8.42% APR and fixed interest rates ranging from 3.75% – 9.66% APR. You can borrow up to $150,000 for up to 15 years. Just answer a few questions on their site, and you can get an indication of the rate.
  • RISLA: Just like New Hampshire, the state of Rhode Island wants to help you save. You can get fixed rates starting as low as 3.49%. And you do not need to have lived or studied in Rhode Island to benefit.

Is it worth it to refinance student loans?

If you are in financial difficulty and can’t afford your monthly payments, a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.

This is particularly important if you have Federal loans.

Don’t refinance Federal loans unless you are very comfortable with your ability to repay. Think hard about the chances you won’t be able to make payments for a few months. Once you refinance student loans, you may lose flexible Federal payment options that can help you if you genuinely can’t afford the payments you have today. Check the Federal loan repayment estimator to make sure you see all the Federal options you have right now.

If you can afford your monthly payment, but you have been a sloppy payer, then you will likely need to demonstrate responsibility before applying for a refinance.

But, if you can afford your current monthly payment and have been responsible with those payments, then a refinance could be possible and help you pay the debt off sooner.

Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.

If you are able to reduce the interest rate by refinancing, then you should consider the transaction. However, make sure you include the following in any decision:

Is there an origination fee?

Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, then you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.

Is the interest rate fixed or variable?

Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when.

This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance your student loans to a better option (because all rates will be going up).

We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet. Some providers with variable rates will cap them, which can help temper some of the risk.

You can also compare all of these loan options in one chart with our comparison tool. It lists the rates, loan amounts, and kinds of loans each lender is willing to refinance. You can also email us with any questions at info@magnifymoney.com.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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