Student loan refinancing will save you money if you don’t actually need it

New companies are offering some student borrowers attractive refinancing options. But struggling borrowers are out of luck.

Holly Ittel, 23, is paying off $70,000 in student loans while living in New York City with her boyfriend. (Courtesy of Holly Ittel).

It was a monster they could manage, this six-figure debt. Two years ago, the Salvias, both lawyers in the Harrisburg, Pa. area, bought a two-story home with a fenced back yard for their purebred boxer, Mani. They’re putting finishing touches on a nursery for their first child, a girl, due this winter.

And they’re paying off law school: about $300,000 in combined student loans.

“It’s just one of those things that come off the top,” said Ralph Salvia, 35. “We’re fortunate to make enough money.”

Salvia and his wife, Trisha, represent a sliver of student-loan borrowers who have found a way to refinance. Unlike many struggling student borrowers nationwide. they don’t need anyone’s debt-management help — and that’s precisely why they’re eligible for it.

The Salvias refinanced their student loans this year through Citizens Bank. slashing their interest rates from about 6.75 percent to 2.35 percent, putting their student loan rate lower than their mortgage rate of 3.25 percent. Their monthly payments dropped by $700. The savings, the couple says, will go toward day care.

“I’ve told all my friends to do this,” Ralph Salvia said. “Multiple times.”

On paper, refinancing student debt — like refinancing a mortgage  — is a logical way to save cash. The idea: You often apply for education loans as a penniless teenager and, ideally, graduate four (or seven or 12) years later with a steady job and a healthier credit score.

“It makes sense that you should then qualify for lower interest rates,” said Brendan Coughlin, president of education finance business at Citizens Bank, which last year rolled out its student loan refinancing service. “People who take advantage of this opportunity could save thousands.”

Refinancing, proponents say, is especially attractive as the nation’s total student loan debt burden hits $1.2 trillion. More student loans than credit card accounts are now delinquent. The Class of 2014 was called the most indebted ever . The Class of 2015 is likely to inherit that title.

The grim reality of refinancing, however, is that most borrowers — the average bachelor’s degree graduate with debt owes $29,000 — aren’t eligible for the deal. Education refinancing requires steady income and a high credit score.

Citizens Bank takes on the federal and private student loans of borrowers with a minimum FICO score of 660. Salvia’s is 810. (He won’t disclose his income.) SoFi’s average client makes $150,000, chief executive Mike Cagney said, and has an average FICO score of 770. The company has never had a client default.

Today, a handful of private companies offer student loan refinancing with these strict eligibility requirements. Citizens Bank and SoFi are among the largest, with thousands of customers nationwide. They say refinancing can be an economic boost, a shortcut to buying a home or starting a business.

But student loan refinancing is not for cash-strapped graduates sinking in a quicksand of debt. The cost-cutting tool isn’t designed to relieve the overburdened.

It’s used to get ahead.

“A quirk of lending: The people who have the most difficult financial situations often get the highest interest rates,” said Mark Kantrowitz, publisher of Edvisors.com. “That makes it even more difficult for them to repay loans.”

Companies won’t risk buying a default, Kantrowitz said. The most vulnerable borrowers, those who must seek other debt-management avenues, can improve credit by making every payment on time.

Consumer protections built into government loans make the process easier. Access to federal income-based repayment and emergency forbearance can be lost when debt is privately refinanced. Banks have no incentive to provide these safety nets. Regardless of whether you refinance, though, it’s almost impossible to wipe out student loan debt in a bankruptcy.

Sen. Elizabeth Warren (D-Mass.) introduced a bill  this year to address the country’s student debt problem. (Sen. Sherrod Brown, an Ohio Democrat, attempted a similar move  last year.) Warren’s bill, which was backed by Democrats and would have allowed many more borrowers to refinance loans, died over the summer in the Senate and was blocked again last month by Republicans. The measure would have enabled people with older loans to adopt much lower interest rates.

Warren proposed taxing millionaires to fund the program, an approach Republicans opposed. She has pledged to keep pushing .

“Homeowners are refinancing,” she said at a recent news conference. “Small businesses are refinancing. We just want young people who got an education to have their shot.”

The current interest rate on undergraduate federal Stafford loans — the most widely borrowed — will be 4.66 percent this school year. an increase from last year’s 3.96 percent. Graduate students’ Stafford rates increased to 6.21 percent, from 5.41 percent. Interest rates on older federal student loans can hit 9 percent, or even higher.

Students who borrow from the government often also finance their education through private loans with often higher rates. Some experts say the contrasting outcomes of rich borrower, poor borrower drive inequality in the United States.

Holly Ittel, 23, wonders how she’ll pay off more than $70,000 in student loan debt. Last week, she had $5 in her bank account.

An artist from Ohio who babysits for wealthy New York City families, Ittel tries not to think about her 9 percent interest rate. She won’t bother trying to refinance her student loans — a lost cause.

Still, Ittel doesn’t regret studying ceramics at Ohio University, though the program cost far more than the community college in her hometown. “I followed my passion there,” she said. “But I didn’t fully realize what I was getting into. I wasn’t fully aware of the debt until after graduation.”

Her monthly income is about $1,200. Her rent in the Bronx is $1,200, split with her boyfriend. Her parents, a farmer and a nurse, cover her private loan payments. Her federal loans are in forbearance until next year.

Ittel searches each day for a higher-paying job, one in the art field. Her dream is to work at a museum. For now, she says, the best way to manage debt is to defer it.

She’ll apply to graduate schools this winter.

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