Know This Before Refinancing A Student Loan


LOAIf you’re among the 40 million Americans coping with student debt, you may be in luck. A handful of young lending firms want to refinance your loans at significantly lower interest rates than traditional banks offer. 


The caveat? You still need to be in strong fiscal standing (and the credibility of an elite degree doesn’t hurt.)


Startups like CommonBond, SoFi (also called Social Finance), and Earnest are recognizing the potential in more (traditionally risky) clients, while still bringing in steady revenues. Take Elena Lucas, for example. 


In 2014, the 27-year-old was deep in loan dept, even as she was earning an annual salary of $85,000 at a wind power company. Lucas had attended Loyola University in Chicago, and then went on to pursue a Masters in International Economics from U.C. San Diego. Her student loans had totaled $120,000. 


Then, in August of last year, Lucas was approved for a refinanced loan with SoFi, a San Francisco-based company that issues personal loans to younger professionals. Her loan was approved at an interest rate of 6.75 percent (that’s one percent point lower than what she had initially received from SallieMae).


Lucas, it’s worth noting, is a unique borrower. She’s currently participating in SoFi’s free six-month entrepreneurship program. In addition to personalized guidance, she has the opportunity to network with prominent angel investors in Silicon Valley, with the option to defer her loans in the meantime. Her one-year-old company, an alternative energy provider called UtilityAPI, has five employees and has raised over $1 million in funding.


In the U.S. alone, student loan debt currently weighs in at $1.3 trillion. If you’re one of the many looking to qualify as a client with these lending firms, here are four things you should know about the student loan refinancing market:


1. It’s a tech-driven business model. 

Lending firms that target young professionals can often charge lower interest rates because they use data-driven web platforms, which allow them to evaluate and take on more potential clients with different risk factors. It also helps that these firms are bolstered by millions of dollars in venture capital. Collectively, SoFi, Earnest, and CommonBond have all reeled in over $740 million from investors like Andreessen Horowitz and Tribeca Ventures. 


“We look at risk differently,” says Aimee Young, SoFi’s chief marketing officer. A loan approval can be based on many factors beyond just the FICO score, which is a calculation of both positive and negative information in a client’s credit report.


2. You’ll need to make a decent salary. 

To qualify, you generally need to have already graduated, be currently employed, and make a sizeable salary, but things like employment history and savings accounts are also considered. SoFi borrowers tend to make somewhere north of $60,000 annually, and their credit score must be above 700.


Read more at INC.