Interest rates could spur student debt refinancing

For millions of American consumers who struggle with paying their share of the total $1.4 trillion in outstanding student loan debt, the Federal Reserve’s plan to steadily increase its key interest rate this year may or may not be a huge factor that affects how much money they end up paying back over time.

The good news is those with a fixed-rate government loan will likely not see a change in their monthly payments.

The federal government stopped issuing variable rate federal student loans in 2006. So only a small number of federal student loan borrowers would potentially have a variable rate if they borrowed before then.

But the group most likely to experience the pain of rising rates is those with private student loans.

Many private student loan interest rates are variable and the monthly payments will ratchet higher each time the Federal Reserve announces a rate increase. There have been four interest rate hikes in the past year alone.

With more rate hikes likely, borrowers who want to get off the variable rate roller coaster and lock in a fixed rate should take action sooner rather than later.

“If someone has a variable rate loan and rates are rising and they intend to keep the full term of the loan, it may be worthwhile to refinance it to a fixed rate loan to lock in current rates,” said Mark Kantrowicz, a Chicago-based student loan expert and publisher of PrivateStudentLoans.guru.

While federal student loans are the most popular way of borrowing for college costs, more than 1.4 million students a year turn to private student loans to bridge the gap between savings and scholarships, according to LendEDU, an online marketplace for student loan

refinancing.

According to LendEDU, about $165 billion of the total $1.4 trillion owed is private student debt.

The overall average private student loan interest rate is 7.99 percent, while the average variable rate for private student loans is 7.81 percent and the average fixed rate for private student loans is 9.66 percent.

Meanwhile, Federal Direct Student Loan interest rates currently stand at 4.45 percent for undergraduates; 6 percent for graduate and professional students; and 7 percent for parents of undergraduate students.

About 60 percent of graduates leave college with some education debt, owing an average $28,400 per borrower.

Student loan refinancing was gaining traction even before interest rates began heading higher, but now it is bigger than ever with an increasing number of financial technology companies, banks and credit unions jumping into the market.

In 2012, only one lender offered both federal and private student loan refinancing products. Today, PrivateStudentLoans.guru lists 25 lenders in this market — a mix of major banks, regional lenders, alternative lenders and credit unions.

The most recent major bank to toss its hat into the student loan refinance ring is Pittsburgh-based PNC Financial Services, which began offering the loans in November, according to Naimesh Patel, general manager for personal and student lending who works out of Charlotte, N.C.

“We recognize student debt is a significant concern for many individuals and we believe this product can help them get a handle on their student loans,” Mr. Patel said.

The rate that individuals pay for student loan refinancing depends on the individual’s creditworthiness. However, the lowest variable rate PNC offers for 10-year loans is 4.49 percent and for 4.59 percent for 15-year loans. The fixed rate for student loan refinancing is 5.39 percent for 10-year terms and 5.49 percent for 15 year terms.

Citizens Bank has been offering student loan refinancing since 2014.

“We were the first traditional bank to enter this market,” said Christine Roberts, head of student lending for Citizens Bank. “In every other credit product, you are offered better rates as your creditworthiness improves. Student loans was the only credit product where you could not improve your rate as you improved your creditworthiness.

Initially, she said, the bank offered refinancing just for private loans. A few months later, it moved into refinancing federal student loans, too.

Ms. Roberts said the lowest variable rate Citizens Bank offers on student loan refinancing is 2.88 percent. Its lowest fixed rate on student loan refinancing is 3.5 percent.

Citizens Bank originated $2.25 billion in student loan refinancing in 2014. The Providence, R.I.-based bank ended 2017 with $8.1 billion in student loan refinancing business.

Neither PNC or Citizens requires that the borrower graduated from college in order to qualify for a refinance. Neither bank, however, will refinance a student loan for anyone who is still in school.

While the student loan refinance market is growing, it is dominated by financial technology companies. Social Finance, also known as SoFi, is the largest player in this space right now. Others include CommonBond, Earnest, Credible and LendKey.

Banks typically charge no fees for a student loan refinance and there is no penalty for prepaying the loan balance. But borrowers who have federal student loans should think twice before refinancing.

Private companies do not offer perks that the federal government provides borrowers, such as incomebased repayment plans and loan forgiveness programs.

Student loans that have been refinanced by private companies also are treated the same in bankruptcy as traditional student loans. They cannot be discharged in bankruptcy.