Refinancing with a State Education Lender

Joe ArnsBy Joe ArnsBy Savingforcollege.com

Some borrowers can lower their interest payments and simplify their finances by refinancing their federal and private student loans with a state education lender. State agencies and state chartered non-profit corporations have a funding advantage that enables them to make loans with lower interest rates than commercial lenders.

Pursuing this option requires good credit or a creditworthy cosigner. Borrowers refinancing with a state lender forfeit the added benefits of federal student loans, such as income-driven repayment plan and potential loan forgiveness.

State Agencies and Quasi-Public Lenders Have a Tax Advantage

Education lenders that are agencies of a state or are a quasi-public non-profit corporation can offer loans more cheaply than commercial lenders. These entities can issue bonds to investors that are exempt from federal income taxes. Investors are willing to accept a lower interest rate since they do not pay income taxes on the interest received. The state agency or quasi-public non-profit can then pass along the savings on their own funding costs to their borrowers.

Borrowers may be able to obtain a lower interest rate on their student or parent loans by refinancing with one of these tax-advantaged entities rather than another private lender, such as a commercial bank. Interest rates may be as much as a half-percentage point to a full percentage point lower or more.


Key Terms of Refinancing Loans Vary

There are 10 U.S. states with their own education loan refinancing programs. These programs vary in terms of residency and credit requirements, loans eligible for refinancing, maximum loan amounts, interest rate options, repayment periods and the ability to release cosigners early.

Many restrict lending to borrowers living in their own state, but refinancing programs in Indiana, Iowa, Kentucky, and Rhode Island are open to any U.S. citizen or permanent resident.

All programs have credit standards. Typically, borrowers or their cosigners must have a good credit score and an acceptable debt-to-income ratio. Specific requirements vary by state.

Most states allow borrowers to refinance all their education loans subject to a maximum loan amount. However, Minnesota does not allow refinancing of Parent PLUS Loans while New Jersey only allows borrowers to refinance Parent PLUS Loans or other loans issued by the state agency.

Maximum refinancing loan amounts are as high as $300,000 but are $100,000 or less in a few states. Three states — Alaska, New Jersey and North Dakota — have no maximum loan amount.

All programs offer fixed interest rate loans. Indiana, Minnesota and North Dakota also have variable interest rate options. The interest rate a borrower receives is based on their creditworthiness.

The four states with programs run by state agencies — Alaska, Minnesota, New Jersey and North Dakota (through a state-owned bank) — either have a single credit tier or a small number of them. All borrowers in Minnesota and North Dakota receive the same interest rate for loans with the same repayment period. Alaskan borrowers get one of two interest rates and New Jersey borrowers are grouped into three credit buckets.

South Carolina also offers a single interest rate to qualified borrowers for a given repayment term, but is the only state with a quasi-public non-profit education lender to do so.

The most common repayment periods offered for refinancing loans are 5, 10 or 15 years. Indiana, Iowa and Kentucky also offer 20-year repayment terms, while North Dakota offers 25-year repayment term to borrowers with debt of $30,000 or more.

Some states have formal early release provisions for cosigners that kick in after 36 or 48 months of consecutive on-time monthly payments. Borrowers must be creditworthy on their own for the cosigner to be released. In states without formal early release options for cosigners, creditworthy borrowers need to refinance again to relieve cosigners of their obligation.


Alaska

The Alaska Refinance Loan is only available to state residents. Loans are funded by a state agency.

The program may be well-suited for borrowers with strong credit. The interest rate is the same for all repayment terms, so comparisons with other longer-term refinance options may be favorable.

There is no maximum loan amount — a borrower could consolidate all their outstanding education debt.

Residency Restrictions

Alaska residents only

Credit Requirements

FICO score of 720 or eligible cosigner

Eligible Loans

All education loans

Maximum Loan Amount

None

Interest Rate Options

Fixed rate only

Repayment Term

Choice of 5, 10 or 15 years

Cosigner Early Release

No

Connecticut

The Refi CT Loan is offered by the Connecticut Higher Education Supplemental Loan Authority (CHESLA). This quasi-public non-profit agency provides student loan refinancing to Connecticut residents. Non-residents are only eligible to refinance an existing loan provided by the state.

Residency Restrictions

Connecticut residents only, unless refinancing a CHESLA loan

Credit Requirements

Acceptable FICO score and debt-to-income ratio of 43% or less

Eligible Loans

All education loans

Maximum Loan Amount

$100,000

Interest Rate Options

Fixed rate only

Repayment Term

Choice of 5, 10 or 15 years

Cosigner Early Release

No

Indiana

The INvestED Refi Loan is available to all U.S. citizens and permanent residents. A quasi-public non-profit provides refinancing of student loans along with commercial lender Bank of Lake Mills.

This program may be a good choice for borrowers looking for a longer repayment term — 20-year loans are available. In addition, this may be a good option for cosigners who would like an early release from their obligation.

Residency Restrictions

All U.S. Citizens and permanent residents

Credit Requirements

FICO score of 670 or eligible cosigner, debt-to-income ratio of no more than 40%-50% (varies based on income), and annual income of at least $36,000

Eligible Loans

All education loans

Maximum Loan Amount

$250,000

Interest Rate Options

Fixed rate and variable rate

Repayment Term

Choice of 5, 10, 15 or 20 years

Cosigner Early Release

Yes, eligible after 48 consecutive on-time monthly payments

Iowa

The Reset Refinance Loan is available to all U.S. citizens and permanent residents. A quasi-public non-profit provides refinancing of student loans along with commercial lender Bank of Lake Mills.

This program may be a good choice for borrowers looking for a longer repayment term — 20-year loans are available.

Residency Restrictions

All U.S. Citizens and permanent residents

Credit Requirements

FICO score of 690 or eligible cosigner, debt-to-income ratio of no more than 40%

Eligible Loans

All education loans

Maximum Loan Amount

$300,000

Interest Rate Options

Fixed rate

Repayment Term

Choice of 5, 10, 15 or 20 years

Cosigner Early Release

No

Kentucky

The Advantage Refinance Loan is available to all U.S. citizens and permanent residents. Loans are provided by the quasi-public non-profit Kentucky Higher Education Student Loan Corporation.

This program may be a good choice for borrowers looking for a longer repayment term — 20-year loans are available. In addition, this may be a good option for cosigners who would like an early release from their obligation.

Residency Restrictions

All U.S. Citizens and permanent residents

Credit Requirements

FICO score of 690 or eligible cosigner, debt-to-income ratio of no more than 40%

Eligible Loans

All education loans

Maximum Loan Amount

$300,000

Interest Rate Options

Fixed rate

Repayment Term

10, 15 or 20 years

Interest Rate Advantage

Yes, eligible after 36 consecutive on-time monthly payments

Minnesota

The Self Refi Loan is only available to state residents. Loans are funded by a state agency.

This program may be a good choice for borrowers with average credit — Minnesota offers the same rate to all eligible borrowers. In addition, this may be a good option for cosigners who would like an early release from their obligation.

Residency Restrictions

Minnesota residents only

Credit Requirements

FICO score of 650 or eligible cosigner, debt-to-income ratio of no more than 50%-60% (or 45% without cosigner)

Eligible Loans

All student loans; Parent PLUS Loans are not eligible

Maximum Loan Amount

$70,000 for Bachelor or graduate degree; $25,000 for certificate, diploma, or associate degree

Interest Rate Options

Fixed rate and variable interest rate

Repayment Term

5, 10 or 15 years

Early Cosigner Release

Yes, eligible after 48 consecutive on-time monthly payments

New Jersey

The NJCLASS Refi+ Loan is only available to state residents. Loans are funded by a state agency.

This program is designed to help parents who wish to obtain a better rate on their Parent PLUS Loans. There is no maximum loan amount. Refinancing is also available for other New Jersey supplemental education loans.

Residency Restrictions

New Jersey residents, unless student attended school in NJ with the proceeds of the Parent PLUS loan to be refinanced

Credit Requirements

FICO score of 670 or eligible cosigner, plus debt-to-income requirements

Eligible Loans

NJ state education loans and Parent PLUS Loans only

Maximum Loan Amount

No maximum

Interest Rate Options

Fixed rate

Repayment Term

10 years

Early Cosigner Release

No

North Dakota

The DEAL One Loan is only available to state residents. Loans are funded by a state-owned bank.

This program may be a good alternative for borrowers with a large amount of education debt who prefer an extended repayment period. The repayment term is tied to the amount of debt refinanced. Loans of more than $30,000 are eligible for a 25-year repayment period. The interest rate is the same regardless of the term.

Residency Restrictions

North Dakota residents only

Credit Requirements

Not published

Eligible Loans

All education loans

Maximum Loan Amount

No maximum

Interest Rate Options

Fixed rate and variable rate

Repayment Term

10 (for loans up to $10K), 15 (loans greater than $10K to $20K), 20 (loans greater than $20K to $30K) or 25 years (loans greater than $30K)

Early Cosigner Release

Yes, eligible after 48 consecutive on-time monthly payments

Rhode Island

The RISLA Refinance Loan is available to all U.S. citizens and permanent residents. Loans are provided by the quasi-public non-profit Rhode Island Student Loan Authority (RISLA).

Residency Restrictions

All U.S. Citizens and permanent residents

Credit Requirements

Not published

Eligible Loans

All education loans

Maximum Loan Amount

$100,000-$250,000 depending upon degree attained

Interest Rate Options

Fixed rate

Repayment Term

5, 10 or 15 years

Early Cosigner Release

No

South Carolina

The PAL Refi Loan is only available to state residents. Loans are provided by the quasi-public non-profit South Carolina Student Loan.

This program may be a good alternative for state residents with average credit — the interest rate is the same for all qualified borrowers with identical repayment periods.

Residency Restrictions

South Carolina residents only

Credit Requirements

FICO score of 675 or eligible cosigner, plus debt-to-income ratio of 30% or less if FICO score is under 725

Eligible Loans

All education loans except Perkins Loans

Maximum Loan Amount

$150,000

Interest Rate Options

Fixed rate

Repayment Term

5, 10 or 15 years; 15-year option only available on loans of $20,000 or more

Early Cosigner Release

No


Weigh the Pros and Cons of Refinancing with State Lenders

Refinancing with a state-based education lender is an alternative best suited to borrowers with good credit. Eligible borrowers often receive interest rates that are lower than those available with commercial lenders.

However, borrowers need to consider the downsides of student loan refinancing, whether refinancing with a state-based program or with a commercial lender. Federal student loans allow for more flexibility in paying loans back, including income-driven repayment. Many federal loans are also eligible for loan forgiveness. Borrowers who wish to preserve these benefits should consider a Federal Direct Consolidation Loan.

Even borrowers who are a good fit for state-based refinancing need to compare the interest rates offered by state lenders and commercial lenders. The rates offered for a particular credit profile may be similar, or different only for certain repayment terms.

Those with graduate or professional degrees may find lower interest rates by refinancing through a commercial bank in some cases. State-based lenders usually offer the same interest rates regardless of the type of degree attained, but commercial lenders may treat advanced degrees more favorably.



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