Borrowers routinely refinance mortgages and other loans when interest rates drop. So why not student loans?
Refinancing options for student-loan debt have been hard to come by, but a handful of promising developments are giving borrowers better chances of climbing out from under the $1 trillion owed by former students for their college costs.
President Obama this week vowed to expand a program limiting repayment of federal student loans to 10% of a borrower’s income, and the U.S. Senate is considering a bill that would give more protection to students who use private loans.
“We want more young people becoming teachers and nurses and social workers,” Obama said Monday while announcing the expansion of the Pay As You Earn program. “We want young people to be in a position to pursue their dreams. And we want more young people who act responsibly to be able to manage their debt over time.”
But some in the private sector are stepping up as well.
While it is still difficult to refinance through big banks, a handful of newer, more innovative startups have figured out a way to make life easier for student borrowers while still making a profit for themselves.
Now that it is getting easier to repay federal student loans, a growing number of private lenders are offering new ways to ease repayment of high-interest private educational loans as well.
One company, called Pave and based in New York, essentially uses crowdfunding to buy out existing loans, which are then repaid based on the borrower’s income.
Even without interest, Pave loans end up costing borrowers about the same as other loans because of fees—a $25,000 loan, for example, costs $35,212 to repay, compared to $35,329 for a private loan with 7.32% interest—but the company allows more flexibility and forgiveness than most banks.
For example, if students (Pave calls them “talent”) go to graduate school or make less than one and a half times the poverty level, their payments can be deferred, something conventional lenders mostly don’t allow. Repayment rates vary with each borrower, depending on their profession and other factors.
SoFi, a San Francisco company, says it saves borrowers who refinance their loans an average of $9,400 over 10 years by offering low fixed-rate and variable interest and career coaching, but its loans are limited to “highly qualified” graduates and do not include the same flexibility that Pave does—except for a six-month forbearance for borrowers trying to set up their own companies, though interest continues to accrue during that time.
Other startups also are designed to save money for “high-quality” borrowers. Founded by former Google employees, Upstart considers which school a borrower attended, academic performance and work history before providing low-interest loans to students it considers good bets. The company’s backers include Google’s Eric Schmidt and Dallas Mavericks owner Mark Cuban.
And CommonBond allows some borrowers with MBA, law, medical and engineering graduate degrees to save thousands, with 10-year rates as low as 5.99%.
This new attention to the student-loan market isn’t particularly surprising. Two-thirds of students at four-year private, nonprofit universities and colleges take out loans, and more than half of students at public institutions, the U.S. Department of Education reports. The proportion of all students who borrow is up 11 percentage points since 2000, and their average debt has risen 36%, to $6,800. At private, for-profit colleges and universities, it’s $8,400.
Yet repayment terms are extremely rigid. Only in rare cases can student loans be forgiven, even in bankruptcy. And the recession made things worse, leaving student borrowers with far fewer refinancing options than holders of mortgages and other types of loans, said Rory O’Sullivan, deputy director of Young Invincibles, an advocacy group representing 18- to 34-year-olds.
“The private loan industry pretty much dried up,” O’Sullivan said. “It can be pretty challenging, and it’s not guaranteed that everyone is going to qualify.”
About 10% of the 4.7 million students who graduated with federal loan debt in 2011 had defaulted by 2012, meaning they didn’t make any payments for at least nine months, the government reports.
That’s why most of the new, lower-cost lenders are only going after students they consider sure bets.
Darien Rowayton Bank refinances graduate-school loans, for example, specifically those from MBA, law, medical, nursing, pharmacy, and engineering programs. With fixed rates as low as 3.5%, the bank’s loans are among the cheaper options on the market.
Also for borrowers with graduate-school loans, CommonBondrefinances at interest rates as low as 5.99%. Using that rate, a borrower with $100,000 in debt and a 7.9% rate would save more than $15,000 over a decade with a CommonBond loan.
Federal loans are usually better deals than private ones, but many borrowers don’t know how to have them delayed, lowered, or entirely forgiven—or even that those alternatives exist.
Federal loans allow early repayment without penalty, saving money on interest, and deferments, which freeze principal and interest payments for students who stay in college or enroll in graduate school at least half time, are unemployed, or serve in the military.
There also is an income-based repayment program, called Pay as You Earn, available since 2012 and under which federal student-loan borrowers can cap their monthly payments at 10% of their income and have their loans forgiven altogether after 20 years. But fewer people know about, and take advantage of, this program than are estimated to be eligible.
Graduates employed full-time for at least 10 years in public service or government jobs or by nonprofit organizations can have their federal loans forgiven altogether. So can students enrolled at a university or college that closes, and, under new rules, borrowers with disabilities.
With any refinancing, the small print is important, experts said.
“You want to look at disclosures, whether it’s fixed-rate or variable, whether there’s a balloon payment,” said Deanne Loonin, an attorney with the National Consumer Law Center. “People really have to exercise caution.”
Some bigger banks will consolidate student loans so borrowers can make one payment per month, but refinancing is harder to come by at those banks. The same goes for credit unions, although they’re sometimes easier to work with and may be willing to discuss refinancing with members.
Refinancing student loans into a home equity loan is also risky, said Rohit Chopra, the student-loan ombudsman for the federal Consumer Financial Protection Bureau. “Your rate may be lower, but it puts your home at risk.”
And home equity loans lack the tax advantages student loans have, he said.
Those looking to restructure their private loans should consider credit unions and startups, Chopra said, especially given the dearth of other options.
“I think many of the existing lenders are reluctant to offer student loan refinancing,” he said. “In some ways, (refinancing) is reducing their own profit margins.”
by Matt Krupnick
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