Student loan debt has exploded over the past decade leaving many college graduates in a deep hole as they begin their careers. This is particularly true in Minnesota where the average student loan debt is about $31,000, ranking us 5th in the country. Unfortunately, many of these loans are at relatively high interest rates relative to other types of loans. It is common for us to see student loan interest rates approaching 7% or more.
This past week Minnesota rolled out a new program to help with the student loan burden. It is called the SELF Refi Program and it allows certain Minnesota student loan borrowers to refinance their loans at potentially lower interest rates. The following is a link to the SELF Refi website for more information: www.selfrefi.state.mn.us.
We reviewed the program for one of our clients and it appears to be a great option for some people. The minimum loan amount is $10,000 and the maximum refinance is $70,000 for a bachelor or graduate degree. In our example, she is 29 and has approximately $25,000 of student loans remaining at an average interest rate of 7%. The SELF Refi program gives borrowers a choice of refinancing over a 5, 10, or 15 year period with interest rates increasing at the longer terms. In this case, she had enough cash flow to select the five year loan period. The only remaining question was whether to do a variable rate at 3% or take a fixed rate at 4.5%. It is important to note she would come out ahead with either option. In this case, I suggested the 3% variable rate if she committed to paying off the loan even faster than the five year period. The new loan payment is $449/month and she will save approximately $46/month or about $2,750 in interest over the five year life of the loan! Plus her student loans will be gone in under five years instead of ten years on the current loan period. If she does not want to take any risk of interest rates rising significantly over the next five years, she could do the safer 4.5% fixed rate option and still save about $1,920 over the life of the loan. Either way she is making a great financial decision to pay off her loans more quickly and save a lot of interest in the process.
The following are some general observations and recommendations about the SELF Refi Program:
- You must have a credit score of at least 720 in order to be approved or you would need to have a co-signer on the loan.
- The program is most beneficial for people with strong cash flow that can select the five year option. Benefits of refinancing diminish over the ten and fifteen year periods mainly because of higher interest rates resulting in lesser potential savings. We think it is reasonable to select the lower variable rate option on the five year loan, but would be more inclined to recommend the fixed rate for ten and fifteen year options (currently 5.75% on the ten year and 6.95% on the fifteen year).
- The website has a repayment calculator to help determine how much money you might save by refinancing your student loans (http://www.selfrefi.state.mn.us/calculator.cfm).
- Carefully consider refinancing if you work for government or a not-for-profit and could potentially qualify for the Public Service Loan Forgiveness Program (http://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service). Refinancing would eliminate this option.
- There are no origination fees or other upfront loan charges and there is no penalty for early repayment of the loan so you retain the option of paying your student loans off more quickly, if possible.
We have met with many college graduates struggling under the increasing weight of student loan debt. In recent years, the federal government took over most of the student loan program and eliminated attractive refinance options that used to be available. We are pleased to see the State of Minnesota take a proactive approach on this important financial planning issue and believe this will likely become a very popular program.