August 7, 2015

Affluent borrowers present niche market for student-loan refinancing

Is the traditional target for a refinanced student loan a doctor earning more than $150,000 per year? Or a lawyer several years out of law school? Perhaps not at one time, but more financial institutions are turning to this demographic as they look to grow their customer bases.

Today, a growing trend in this industry is the refinancing of student loans for affluent professionals, years out of college and with high credit scores.

Target demo wants to refinance
For banks, diving into the segment is as easy as putting out the word. That's because many professionals who fit this description are interested in refinancing.

For example, MainStreet spoke to Sara Hamilton, a law school graduate with more than $100,000 in student loan debt. When working with Darien Rowayton Bank, Hamilton refinanced a majority of her student loans, cutting monthly payments by more than $60 and reducing the term length from 25 years to 15 years.

"I do not regret my decision at all," she told MainStreet. "I actually sleep better at night knowing that I am paying what I believe is a fairer interest rate in the marketplace."

Another key reason why this practice is attractive to financial institutions and borrowers alike is the current interest rate environment. With rates lower now than they have been in the past, many former students may want to take advantage and refinance. To top it off, student loan debt has been on the rise in recent memory, with more people borrowing greater sums than before.

Lenders look to student-loan refinancing
While refinancing student loans could technically work for a wide range of borrowers, many lenders today are keying in on only affluent former students with quality credit scores.

According to the Wall Street Journal, lenders are doing this to gain a competitive advantage on other banks. It is also an opportunity to connect with well-off borrowers, many of whom are likely to become long-time customers in other areas. Right now, lenders are pushing for student-loan refinancing through emails, social media and partnerships in certain industries, like medicine and law.

The push to refinance affluent borrowers isn't ideal for everyone, however. Some advocates are concerned that lenders will focus all their efforts here, all while denying refinancing from lower-income former students who may need the assistance more.

Dan Feshbach, chief executive of MeasureOne, told the Wall Street Journal that the borrowers targeted by lenders are "totally cherry-picked." He added that it makes sense that lenders would choose this demographic, since wealthy borrowers are less risky.

On the other hand, opting to only approve affluent borrowers may leave lenders with a shortage of applicants down the road. If refinancing student loans proves lucrative, banks will want to grow this practice - and that means expanding into more borrowers with greater risk.

For more information on student loans and the process of buying and selling student loan portfolios, feel free to reach out to loan sale advisory firm Garnet Capital Advisors.