Student loan debt is a fucking scourge. It leaves countless recent college grads struggling to keep their heads above water while simultaneously trying to find steady employment, and makes it impossible for many young people to begin saving for the future. As someone who is almost $100,000 in debt, a pile that's only growing despite my making payments every month, I have a vested, uh, interest in figuring out how to untangle this clusterfuck.
Unfortunately, there's not a lot that can be done. If you have federal loans, like I do, the government will stop at nothing to extract every last dollar it can from you, to the point of garnishing your wages. There are a couple of tricks that can ease the pain of private loans, but they involve haggling or borrowing more money to pay off what you already owe. The last possible option, I figured, was to refinance.
That's a word politicians have been throwing around a lot lately in order to court millennial voters. In August, Hillary Clinton announced a new plan that focused on making public universities debt-free and lowering interest rates, included those of people who've already graduated. In fact, all of the remaining Democratic candidates have promised students they'd be allowed to renegotiate their loan under more favorable terms if they were elected.
But that doesn't help me right now. So in an attempt to figure out what I could do, I signed up for something called StudentLoanHero.com, which is supposed to help you figure out a repayment plan. I quickly learned why my debt keeps growing —my interest rates average out to more than 7 percent, my balance is going up by $354, and I'm paying like, a third of that. In a word: Fuck.
Immediately I got on the phone with Andy Josuweit, the company's founder, to ask what I could do to renegotiate my loan. What I learned is that refinancing is not a panacea, like I always hoped it would be. "At the end of the day, I don't think refinancing is for everyone," he told me. "It's not, to be honest."
VICE: First off, what's your own experience with student loans?
Andy Josuweit: I went to a fancy private school in Boston, and I graduated with a lot of student loan debt. At the time of graduation, I was close to $74,000, which meant I had 16 different loans with three servicers. And then it was the bottom of the recession, and I couldn't get a job. Monthly payments were at like $1,100. I ultimately went into forbearance and income-based repayment. Over three years I accrued roughly $30,000 in interest, so at the worst of it I was at upward of $107,000.
I started StudentLoanHero because I wasn't getting smart financial advice. What we do is allow people to sign up for free and then we give them recommendations based on their socioeconomic situation.
It sounds like you get my problem then. I was like $80,000 in debt, and now I'm like $96,000 in debt. Can refinancing solve all my problems?
It depends on a few certain circumstances. Your federal loans come with certain protections. What you need to do is figure out if you're actually gonna use those benefits. The way I typically have people think about it is: If you lose your job, are you gonna have the ability to make payments? Private lenders may give you six months or even 12 months deferment, but they're a lot less flexible in helping you out when you're in a bad financial situation. If you're not totally secure it might not make sense to refinance.
Another thing you can do is cherry-pick. If you have some high-interest rate loans and then some other ones, you can just refinance the highest ones and keep the lower-rate ones with the federal government.
What about consolidating? That also sounds like a cure-all. Is it?
It doesn't really help people. It's really a way to just make it easier to manage your student loans. It actually keeps people from being able to cherry-pick for refinancing. So it's OK to consolidate, but you have to figure out what debt-repayment strategy you're using. For instance, the "debt avalanche" is paying off your loans in accordance of the highest interest rate loans first. The "debt snowball" is paying off your loans by the lowest-principal loans first. So as soon as you consolidate, you just have a big loan sitting there and you can't use these strategies. The government really pushes direct loan consolidation, and if you're gonna enter into an income-based repayment plan or public service, sometimes that's required. The long story short is that it's not really a beneficial tool for anybody.
OK, so wait, what is refinancing, and why would a lender want to give me a lower interest rate? What's in it for them?
The definition of refinancing is basically somebody is giving you a new deal. You're literally re-financing. It comes with a new term, a new interest rate. Typically student loans are on a ten-year term, so you would be able to choose five, ten, or 20 years. With Earnest, one of our partners, you can choose any term, like 11.3 years, which helps you find a payment that fits your situation. So refinancing is simply changing the term of the loan and typically the interest rates.
The reason why lenders are willing to do this right now is because interest rates are low. It's based on LIBOR—London Interbank Exchange Rate—which is the rate at which banks get money from central banks. It's super low right now. It's basically an arbitrage situation in which we got loans five or ten years ago and the market was different. Now there's an opportunity for people to buy those loans at a lower rate.
So what happens in refinancing? The bank pays off the loan to the government, and then I just owe them, right?
That's basically how it works. They don't need approval for the government or your lender. They have you fill out an application and check your employment history, credit score, and income. And then they ask you to give them a ten-day payoff balance. Which is if you were going to pay off your loan in ten days, what would it be. And then once the lender has that, they send the current lender a check for that amount, and will literally pay off the loan. In the process you sign legal documents saying you owe the debt to the new lender.
How much money do I need to make to convince a bank they should let me do this?
Some of the sponsors we work with, the minimal annual income is $24,000. Other lenders we work with, it's like $50,000. So there are options if you are right out of school and not able to build your career yet. The minimum credit score on average is about 680 FICO. You can offset that with a cosigner—we don't recommend that.
That's pretty reasonable. But there's a big difference between making $50,000 while owing $50,000, and making $50,000 while owing $400,000. Doesn't that matter?
So they look at your debt-to-income ratio to determine how strapped you are at the end of the month. That is a big indicator for a lot of lenders. The cool thing about Earnest is they use debt to income to savings. So, have you been making payments, is the debt increasing or decreasing? A lot of other lenders just look at FICO score.
Who do I get to do this? Do I just go to a bank, or are there startups that are doing it better?
A lot of our partners are speciality lenders. We do work with some banks, like Citizens Bank. Wells Fargo does refinance private loans but they will not refinance federal loans, so they're a little bit harder to work with. They're not one of our partners. For the most part, the big entities like SoFi, CommonBond, Earnest—they're all kinda startups. Venture-banked lenders.
I think there's a lot of risk here. Student loans are a different beast than an auto loan or a mortgage, because there's no collateral. There's nothing to kind of back up the risk.
You can't revoke a degree, basically. But people can't declare bankruptcy on loans—doesn't that give enough protection to banks?
Well, they're also not convinced that there's a big market, which I disagree with. Goldman Sachs did a report that found the market size is about $200 billion to $300 billion. And the refinancing market is about $6 billion to $8 billion this year, so there's a lot of opportunity for banks and lenders to enter this space and create a big business.
So, how do I contact all these lenders at once and get the best deal?
We don't do that. A lot of lenders don't like that, because it costs money to see if you're eligible. But you could check out Credible.com, which is a competitor. I shouldn't even say that. But they'll let you check out multiple places at once.
Should I look out for variable interest rates (where the interest rate on the loan changes according to the market) like I did the first time? The idea is terrifying to me, but maybe I should get one?
When you're shopping around, I recommend that you check out at least two or three places. It doesn't hurt your credit score if you're asking about the same product within a 30-day period. So, yeah, if you're planning of paying off this debt within five years, or less than ten years, a variable interest rate might make sense for you. If you're gonna take like, 20 years, the chance that the interest rate market will eventually rise and you'll be stuck with a high rate is probable.
I think I was afraid because I assumed the rate was at the whim of a banker whose goal is to fuck you over. Is it not arbitrary?
It says in the contract that it depends on what happens with LIBOR. You're 100-percent right that if you get a 0 percent APR credit card offer, they can just whack you with 22 percent. But that can't happen here. I guess it can, if the lender puts it in the contract, but typically it's pegged to a market index. A lot of lenders also offer a variable rate cap, which means it can only get as high as like, 8 or 9 percent even if the market goes over that.
Wait, if I refinance, do I lose the ability to make income-based payments?
OK, so that's one check in the "no" category for me. My plan was to make 20 years worth of payments and then get loan forgiveness.
Yeah, yeah. That's interesting. To me, my personal opinion about loan forgiveness is that you're discounting your future income. Like, God forbid your parents pass away and you get some money, for some reason you join a startup and get equity... you should try to pay off your student loans. Your income will likely increase over your lifetime, and taking the back seat to this is gonna discount your ability to get credit cards, an auto loan, a mortgage. It's gonna put a strain on your life. If you wanna wait to live your life until you're 40 or 50 years old, that's an option.
Can you elaborate on how this is fucking me over?
Your debt is gonna keep increasing, so your debt-to-income ratio is gonna keep increasing. What's reported on your credit statement is probably gonna be your standard payment, rather than an income-based one. Lenders are gonna look at the aggregate amount of debt. That's the risk you're taking on.
Hm. That's bad.
This is more conspiracy theory, but what if the government says in 20 years that they're not gonna forgive those student loans.
Fuck! I just don't want this to keep growing. My recommended payment is half of my income. Is there absolutely anything I can do?
Increase your income. Airbnb. Uber. For me, I was living in New York City and I moved out. State income tax is like 9 percent. I moved to Texas where there's no state income tax. I'm saving $10,000 a year right there. Leaving New York, I'm saving another $10,000 because cost of living is so much lower. I still have like $89,000 in student loan debt, and I'm working on it. Once you make a dent in it, it starts snowballing.
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