(Image: Citizens Bank TV Commercial, “A Citizen’s Perspective: Student Lending“)
We’ve all seen the television ads. A woman gets locked inside her car, unable to meet the real estate agent standing right there because student debt is keeping her from buying the house of her dreams. A bride-to-be gets stuck in the aisle, unable to continue the ceremony because of her student debt load.
While this marketing campaign may come with a bit of hype — in reality, 58 percent of current student borrowers took out $25,000 or less in total loans and the national median monthly student loan payment is $222 — there is no denying that people with student loan debt keenly feel the financial burdens of these loans. A recent survey by U.S. News & World Report, for example, found that “97 percent of respondents said student loan debt has affected their ability to meet goals, including increasing disposable income, saving for retirement or a home down payment, and affording marriage or starting a family.” For a breakdown of student debt burden in New York, see our first piece in the series, “A Deeper Look at Student Loan Debt in New York State.”
Borrowers would do well to first understand one thing that student loan refinancing companies have in common: they intend to make money off of servicing student loans. These are not benevolent services, but profit-making ventures for these companies, and their offers may not always be in the best interest of student loan borrowers.
Slick ads such as the example above cater to those student borrowers who are feeling this financial pressure, trying to convince them to refinance their student loans. Borrowers would do well to first understand one thing that student loan refinancing companies have in common: they intend to make money off of servicing student loans. These are not benevolent services, but profit-making ventures for these companies, and their offers may not always be in the best interest of student loan borrowers.
Managing student loan debt can be difficult, and tools such as loan consolidation and refinancing student loan debt through private finance companies may indeed be helpful in lessening the burden some borrowers feel. But the details of such arrangements are critical elements in determining whether they are financially beneficial to student borrowers.
Getting Lower Interest Rates Typically Requires Good Credit Scores
Many private loan refinancers only target borrowers with existing strong credit histories and high incomes, and the most beneficial interest rates and payment plans offered by private loan refinancers typically are available only to a select few: the most credit-worthy applicants, borrowers willing to bring on a cosigner of stable income, those who have graduated college, others who have earned advanced postgraduate degrees, or graduates with large amounts of outstanding debt, for example. Sometimes the most preferential interest rates are available only if borrowers are willing to take on additional costs, like stretching out the number of years required to repay the loan, taking on higher monthly payments and shortening the length of the loan, or those willing to pay an “origination fee.”
Many new graduates have not had sufficient time in the workforce earning and spending independently to accumulate a high credit score and this problem has been exacerbated by federal policy. The federal Credit CARD Act, enacted in 2009, made it significantly harder for people 18 to 21 years old to open a credit card account and thus begin working on their credit history. Since then, more and more recent college graduates are not only first entering the full-time workforce but also just beginning their credit histories.
A recent analysis of private student loan refinancers said of one of the country’s largest private student loan refinancers, “[it] prefers to lend to creditworthy borrowers with at least a 650 FICO credit score and consistent income. If you don’t meet the criteria, you may not qualify for a loan or low rates.” Of the top five refinancing lenders analyzed, minimum qualifying credit scores ranged from 650 to 700 — the average FICO score in America across all ages is 695, and 38 percent of people under age 30 have a credit score lower than 621.
Maybe most importantly, student loan borrowers should understand that refinancing arrangements easily may add to, not lessen, the total amount they owe — and that they must pay back.
Private Loan Refinancing May Increase the Amount Borrowers Owe
Maybe most importantly, student loan borrowers should understand that refinancing arrangements easily may add to, not lessen, the total amount they owe — and that they must pay back.
Consider the follow statements found on the website of one company heavily marketing its refinancing services to student loan borrowers:
“Borrower’s overall repayment amount may be higher than the loans they are refinancing even if monthly payments are lower.”
And,
“The borrower’s overall interest rate may be higher than the interest rate on the loans they are refinancing even if their monthly payments are lower.”[1]
That’s right: a refinancing arrangement may lower a borrower’s monthly payment, but both the overall amount owed and the interest rate charged may still be higher than under the terms of the original loan!
One refinancing company’s website notes, for example: “The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%.” This is similar to high-interest credit cards.
Other arrangements convert a student loan with a fixed interest rate, and thus stable monthly payments with a fixed repayment period, to a loan now subject to a variable interest rate. One refinancing company’s website notes, for example: “The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%.”[2] This is similar to high-interest credit cards. Fluctuations in the national economy and the financial markets could drive interest rates up on the outstanding balances of student loans refinanced with variable interest rates, significantly increasing the total cost of these loans to borrowers.
Private Loan Refinancing May Preclude Borrowers from Loan Forgiveness Programs
Using a private refinancing company to repackage their loans may wipe out the eligibility of student borrowers to participate in federal loan forgiveness programs, income-based repayment programs, or other attractive and beneficial options available from public student loan servicers.
The federal government offers a free program for student borrowers to consolidate multiple loans into a single loan with a fixed interest rate, one that is the average of the interest rates of the combined loans. Borrowers won’t save any money on interest under this arrangement, but it can make repaying easier by requiring only one monthly payment instead of several. And the ability for eligible borrowers to participate in loan forgiveness programs and income-based repayment plans is preserved.
New York State Student Loan Borrowers Have Tools at Their Disposal
In 2012, the State University of New York launched a free, comprehensive financial literacy education service called Smart Track® that is targeted to all student borrowers. Courses and information are provided both for high school students exploring college options and evaluating payment options as well as for current college students. The online service is designed “to help SUNY students borrow responsibly. The program encourages students to borrow only what they need, know exactly what they’re borrowing, and stay in college.”
The New York State Department of Financial Services also has established a Student Lending Resource Center that provides a tremendous amount of valuable information for student borrowers, including general information about financing college education and money management, answers to questions about student loan repayment options and forgiveness programs, and a hotline to handle complaints about student lenders. An earlier analysis by the Rockefeller Institute noted other student borrower protections in New York State, and initiatives elsewhere that could serve as models for additional action.
Even Citizens Bank, the financing company running the “stuck in life because of student debt” television commercials used as an example earlier, has on its website an educational video explaining the difference between loan consolidation and loan refinancing, includes all relevant details related to its refinancing offerings in various footnotes throughout the website, and offers decision-making resources at a page entitled “Should I Refinance My Student Loans?”[3]
Caveat Emptor (Let the Buyer Beware)
Put simply, private student loan refinance companies are doing what they’re designed to do: make a profit by convincing people to borrow money from them rather than from someone else, such as the federal government. While there are bad loan-servicing actors out there — for example, Navient, the nation’s third-largest student loan company, is facing a lawsuit claiming that the company purposefully steered student borrowers toward higher-cost repayment options — in the vast majority of cases all the information student borrowers need to make financially prudent choices is out there. Tools like Smart Track® and the Student Lending Resource Center are important truth-in-lending programs. Student borrowers would be wise to seek out this information, understand it, and fully recognize the financial impact taking on this new form of debt will have.
And read the fine print.
NOTES
[1] See “Student Loan Refinance,” Citizens Bank, accessed March 15, 2019, https://www.citizensbank.com/student-lending/education-refinance-loan.aspx.
[2] Ibid.
[3] “Should I Refinance My Student Loans?,” Citizens Bank, accessed March 15, 2019, https://www.citizensbank.com/learning/should-i-refinance-student-loans.aspx.
ABOUT THE AUTHOR
Brian D. Backstrom is director of Education Policy Studies at the Rockefeller Institute of Government.
READ THE SERIES
A Deeper Look at Student Loan Debt in New York State
Understanding the actual size, scope, and impact of student debt in New York is critically important if issues are to be properly addressed and solutions appropriately tailored to provide the most effective relief.
How States are Protecting Student Loan Borrowers
What can be done to prevent predatory lending and student loan repayment practices? The federal Department of Education believes that it has no jurisdiction in this matter or others like it. States, however, are starting to take action.
Avoiding Student Loans: Investing in Prepaid Tuition Plans
Many states offer programs through which families can prepay college expenses at current tuition rates, so that when it comes time for students to enroll in college the financial burden will be less and the need to take out any student loan could even disappear entirely.
Are Student Loan Refinancing Options Too Good to Be True?
Borrowers would do well to first understand one thing that student loan refinancing companies have in common: they intend to make money off of servicing student loans.