Student loan borrowers use risky refinancing for relief

By Amy R. Connolly  |  Sept. 24, 2015 at 2:10 PM
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WASHINGTON, Sept. 24 (UPI) -- Federal student loans have long been considered a low-risk bargain for education, with generally low interest rates and a wide variety of repayment options, but private lenders are beginning to shatter that notion.

An increasing number of young professionals are refinancing their student debt through private lenders, attracted by markedly lower interest rates that put cash back into the borrower's pocket. Those with good credit and a steady income have been reaping the benefits of refinancing and are willing to lose some of the consumer protections federal loans bring.

"We aim to make student loans simple and human, while putting more money back in our borrowers' pockets," said David Klein, CEO and co-founder of CommonBond, one of the major refinancing companies. "With our new rates and loan options, we are excited to deliver a better student loan experience that is tailored to the various needs and preferences of many more graduates with student debt."

At least 43 million people, most under age 40, owe an estimated $1.2 trillion in outstanding student loan debt with an average balance of about $30,000. Some $103 billion of outstanding loans is in default.

Federal student loan interest rates are set by Congress. As of July 1, undergraduate loans are 4.29 percent and graduate and parent loans stand at 5.84 percent or 6.84 percent.

Meanwhile, current interest rates on the market range from 3.5 percent to 8.2 percent for fixed rates and 1.9 percent to 8.98 percent for variable rates, Kim Thompson, vice president of product development at Overture, an online tool that compares loan terms from multiple lenders, told Time.

Some of the biggest risks in refinancing loans come from losing federal-loan cushions: term extensions, income-based repayments, loan-forgiveness programs and the Federal Direct Consolidation Program. Also, refinancing is only available to those with the best credit scores -- 600 or above -- and set income levels.

Some economists have raised concerns about the increase in private refinancing as credit-worthy borrowers exit the federal government's portfolio, leaving low-wage earners and questionable borrowers behind.

In the past months, a number of lawmakers have introduced legislation that may bring the federal government back into the game. That includes the Bank on Students Emergency Loan Refinancing Act introduced by U.S. Rep. Kathy Castor, D-Fla. The bill would allow students to refinance federal student loans at an interest rate of 3.86 percent. The bill also allows students with private loans in good standing to refinance into the federal program and take advantage of the lower interest rates.

"If you can refinance credit card debt or a loan for your boat while interest rates are low, you should be able to refinance your student loan," the Democrat said.

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