Student debt has emerged as a significant concern during the 2022 presidential election season, and this concern is well-founded. The latest data reveals that Americans collectively carry a staggering $1.6 trillion in student debt. This amount had doubled compared to the debt recorded nine years ago and is more than three times the debt reported thirteen years ago when federal authorities first started tracking student loan figures.

While this discussion doesn’t delve into the campaign promises made by presidential candidates regarding student debt, it is worth highlighting that beyond private student loan refinancing, an increasing number of states have taken proactive measures to provide their own student loan refinancing options.

Private vs State Loan Refinancing

Student loan refinancing involves obtaining a new loan to replace your existing student loans, which can include private, federal, and state loans. Private student loan refinancing refers to the process of refinancing your student loans through a private lending institution. Private lenders can include traditional banks, credit unions, and online lenders. Private lenders typically offer borrowers the option to choose between a fixed interest rate or a variable interest rate.

The federal government does not offer refinancing options but several states have stepped in to provide their own refinancing programs As of the most recent update, there are currently 12 states that have established student loan refinance programs. These states include Alaska, Connecticut, Iowa, Kentucky, Louisiana, Massachusetts, Minnesota, New Hampshire, New Jersey, North Dakota, Rhode Island, and South Carolina.

Additionally, several other states, such as California, Maryland, and Oregon, have enacted legislation to create similar programs. Furthermore, states like Montana, Nevada, and New York have engaged in discussions regarding the implementation of their own student loan refinance initiatives.

In North Dakota, the responsibility for student loan refinancing lies with the state bank. In the other states with refinancing programs, these initiatives are typically managed by licensed entities such as the Massachusetts Educational Financing Authority.

State-supervised refinancing programs are primarily limited to state residents or individuals who have attended or are currently attending educational institutions within the state. Some states may have exceptions to these residency requirements. For instance, the Bank of North Dakota permits students from neighboring states like Minnesota, Montana, South Dakota, Wisconsin, and Wyoming to apply for refinancing, even if they did not attend school in North Dakota.

When to Opt for State Refinancing

If you are a resident of or have studied in one of the 12 states mentioned earlier and have less than good credit, exploring a state refinancing program could be a viable option. It has been observed by the National Conference of State Legislatures (NCSL) that some critics have accused private refinancing operators of focusing primarily on refinancing loans for borrowers with excellent credit and high income, a practice known as “cream skimming.” As a result, state-based non-profit programs with more inclusive eligibility criteria have gained popularity alongside private providers, as stated by the NCSL.

Student loan refinancing programs from each state have their own specific rules and requirements. However, there are some common points across many states. Let’s take a look at the Alaska Commission on Postsecondary Education as an example. They offer student loan refinancing with no fees, no prepayment penalties, fixed interest rates, and repayment terms of 5, 10, or 15 years. Borrowers have the flexibility to consolidate their federal, private, and state education loans from any eligible lender. Additionally, borrowers have the option to exclude any federal loans from the refinancing process to retain the benefits associated with those loans.

State refinancing programs can provide more favorable interest rates for borrowers who have less-than-excellent credit. In Iowa, for instance, APRs can begin as low as 3.25%, while in Rhode Island, they start from 3.49%. Although these rates may not be as competitive as those offered by private lenders, they still outperform the rates typically extended to borrowers with good but not excellent credit.

When to Opt for Private Refinancing

While state student loan refinancing programs can offer attractive benefits, there are reasons why individuals may choose to use private lenders. Firstly, the majority of the approximately 45 million Americans with student debt do not reside in states that offer such programs. Secondly, even for those who do live in states with relevant programs, private lenders can sometimes provide more advantageous terms. Private lenders often prioritize borrowers they perceive as low-risk, which typically includes individuals with strong credit, medium to high income, and a stable financial situation.

When it comes to outstanding federal student loan debt, such as Stafford, Perkins, or PLUS loans, borrowers are bound to pay the same fixed interest rate that was agreed upon at the time of loan acquisition. These rates remain unchanged regardless of any subsequent interest rate fluctuations. If you opted for private student loans to finance your college or graduate studies, there’s a possibility that you didn’t secure the most competitive interest rate available at that time.

Typically, young adults at the age of 18 or 22 are not in the most favorable financial positions, often requiring a cosigner (such as a parent or a trusted individual with strong credit) to secure a competitive interest rate for loans. However, as time progresses and you find yourself 10, or 15 years after college, your financial situation may have improved significantly. In such cases, refinancing with a private lender could be a viable option.

Private lenders typically enforce strict minimum credit requirements, often ranging from 620 to 680. However, if you possess good to excellent credit and can demonstrate additional evidence of your financial stability, private lenders may offer you the incentive of a low-rate student loan refinancing.

How to Make a Better Choice?

If you reside in or attended school in a state that provides a refinancing program and your credit is not in the excellent range, it is advisable to explore the options offered by state refinancing programs. For the majority of student borrowers who do not fall into this category, numerous private lenders offer highly competitive rates for student loan refinancing.

When making an important financial decision like this, we recommend comparing the offerings of 3-5 private lenders before making a final decision. If you find yourself uncertain about whether to choose a state program or a private lender, you can always reach out to your state’s lending authority for guidance. Additionally, obtaining free quotes from private lenders can provide further clarity. By comparing the numbers side by side, you can effectively evaluate and compare the different options.