Rising Rates Pose a Risk for Students Looking to Refinance Debt
25 April 2017 - 8:59PM
Dow Jones News
By AnnaMaria Andriotis
Mortgage refinancing isn't the only lending business that could
face pressure from rising short-term rates.
Interest-rate savings on student-loan refinancing are also
shrinking as short-term rates have started to move higher,
according to a new report.
Refinancing student loans has taken off in the last five years
as fintech lenders, led by Social Finance Inc. or SoFi, have been
offering to replace borrowers' federal student loans with new loans
that have lower interest rates.
Until recent years, rates on many federal student loans weren't
based on market rates, but a higher uniform rate set by the
government.
Now, the savings are declining for some of the most creditworthy
borrowers. Those with the highest credit scores who refinanced
early this year received an interest rate that on average was about
2.2 percentage points lower than the rate on their original loan,
according to LendKey Technologies Inc., which tracks student loans
at credit unions and community banks. In 2014 and 2015, the average
interest rate savings exceeded 3 percentage points.
Rates on private student loans are usually pegged to the
one-month or three-month London interbank offered rate, which have
been moving up in recent months with the Federal Reserve's
short-term interest-rate target.
Meanwhile, interest rates on newly issued federal student loans
are down. Unsubsidized Stafford loans, for example, given to
undergraduate students for the current academic year have a fixed
rate of 3.76%, compared with 4.66% two years before and 6.8% four
years prior.
The decline in federal student-loan pricing is largely the
result of a repricing strategy implemented by the federal
government starting for the 2013-14 academic year. Since then,
federal student-loan rates have been based on a rate from the last
10-year Treasury auction that occurs each May. Between 2006 and
until this change, federal student-loan rates had been set in
advance by federal law.
Still, refinancing can result in significant savings for many
borrowers. That includes those who still have older federal student
loans at high rates. Borrowers who signed up for private student
loans to attend college that have high rates could also benefit if
their credit scores have since improved.
LendKey says student-loan refinances topped $200 million in 2016
for the institutions on its platform, up 80% from a year prior. It
says the savings borrowers receive remain substantial, adding that
the decline in savings is likely due to the small number of
borrowers in some of its credit-score brackets. Borrowers who
refinance their loans with credit unions and other small banks
receive an interest rate that on average is 2.2 percentage points
lower than the rate they were previously paying, according to the
firm.
But the dip in savings among certain credit scores points to a
broader issue for the student-loan refinance industry. Sustaining
growth for these lenders has been largely based on how long they
can offer rate savings that are large enough to give consumers the
incentive to refinance. Those savings, for many borrowers, also
need to be big enough to offset the fact that they are giving up
federal repayment protections, such as loan forgiveness, when they
switch from federal to private loans.
SoFi's chief executive, Mike Cagney, has been vocal about the
limited time-span on this market for several years, warning that
lenders who enter the market just to focus on student-loan
refinances aren't pursuing a good strategy. SoFi has in recent
years expanded to other loans, including mortgages and personal
loans, pitching those products to its student-loan borrowers.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
(END) Dow Jones Newswires
April 25, 2017 06:44 ET (10:44 GMT)
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