September 14, 2018

What's the Solution for High Cost Student Loans?


As the number of people with student loan debt continues to increase, innovative banks and credit unions are developing refinance products that benefit consumers trying to lower their payments. Refinance products can also benefit financial institutions; consumers may take advantage of other products as well as refi options. 


The amount of student loans in the U.S. is closing in on $1.5 trillion. Not only is this a record-breaking level, the amount is projected to keep climbing, fueled by two factors: the rising cost of attending college, and the increasing number of students convinced that college is a career gateway.

Paying for schooling is rising exponentially.

High Student Debt Levels Affecting Ability to Access Other Debt

Although many student loans are made by the Federal government (over 90% of the loans made), banks also play a large role. Wells Fargo, for example, is the nation’s second biggest underwriter of student loan debt.

While student loan debt may be a good business for banks and other financial institutions, there is considerable evidence that it delays younger borrowers from settling down in life in a way that past generations have. Household formation is being delayed as student loan borrowers spend a high proportion of their disposable income on student loan servicing rather than, say, buying a home or beginning a family. In fact, some data indicates that even retirement savings are being impacted.

As a result, student loan debt is affecting graduates borrowing power and thus banks’ ability to do business with people who have high levels of student loan debt — and the number of those people is rising.

Student loan payments may inhibit consumers from buying homes and starting families, as they affect disposable income.

Financial Institutions Stepping into Refi of Student Loans

As a result, a number of financial institutions are offering products to refinance student loans. Refinancing can lower the interest rate, and thus reduce monthly payments, freeing up disposable income.

First Tech Federal Credit Union, for example, researched the needs of its customer base regarding their student loans and developed several refi options, including some that allow student loan borrowers to pay off their debt as quickly as possible and some products that are designed to free up cash flow.

Other banks, like Citizens Financial, Laurel Road and SouthEast Bank, also provide refi loans, according to American Banker. Fintech institutions like SoFi have moved heavily into the market. In the past 6 years, SoFi and other Fintechs have bundled refi loans into loan collateral for bonds, roughly $18 billion worth.  Social Finance and CommonBond, two other Fintechs, also provide refi loans.  These borrowers have lowered refinanced their government backed loans into a lower payment, fixed rate (mostly) loan.  In doing so they are now out of the federal system and not able to take advantage of many of the borrower benefits of these programs.  The borrowers entering the refinance loans are generally of the highest quality and thus lower the credit quality of the remaining government loans outstanding.

American Banker has speculated that Wells Fargo may move into the refi market heavily. However, while observers think that Wells Fargo, like credit unions, has had requests from their student loan borrowers to do so, Wells Fargo may not find refi products an attractive option.

For one thing, student loan interest rates tend to be less than those on personal loans, the loans have high balances, are unsecured and the terms are generally long. Banks like Wells Fargo might see it as more advantageous to drive consumers toward personal loans as a way to consolidate their student loan debt. 

For another, even though Wells is a large player in the student loan market, the total amount of student debt it holds is just under $12 billion, a very small percentage of its consumer loan business, which stands at $441 billion.

How a Loan Sale Advisor Can Help

As student loan debt continues to rise and affect both banking consumers and banking business, credit unions and banks can play a big role in helping students refi out of high cost student loans.

A loan sale advisor like Garnet can facilitate those relationships to help lenders broaden their product offerings to their own customers or add these attractive loans.  Partnerships are available to generate these types of loans.   Browse white papers for more information.