In the booming world of student loan refinancing, most potential borrowers are left out. Only those with high-paying jobs, stellar credit histories, and the ability to bring in mom and dad as co-signers can usually get past the bar.
Private lenders from SoFi, Providence-based Citizens Financial Group, and even the Massachusetts Educational Financing Authority have jumped into the private and government student loan refinance market to help overwhelmed millennials save tens of thousands of dollars.
But consumer advocates worry student loan refinancers are selecting borrowers, leaving behind those who need the most help and widening the gap between those who can get out of debt and move on to other financial stages. , such as buying a house and starting a family and those who cannot.
“The options are for people who have excellent incomes and excellent credit history. They are doctors and lawyers. These are the people who benefit from refinancing programs,” said Adam Minsky, a Boston attorney who specializes in student loan issues. “For borrowers who have larger loan balances, no co-signers, or are in financial difficulty, these people have no options. No one is going to refinance them.
Student loan refinancing has become a big business for some private lenders, who are looking for reliable sources of income in an otherwise low interest rate environment.
Citizens expanded its student loans to include refinancing in 2014 and has since grown its portfolio from $2 billion to $5.5 billion at the end of June. Student loan refinancing is now driving about half of the bank’s consumer loan growth, matching the combined growth of mortgages, credit cards, auto loans and equity loans home, said Brad Conner, vice president of retail banking at Citizens.
“The program really met our expectations,” Conner said. “We believe there is a huge untapped market.”
SoFi, or Social Finance Inc., began in 2011 to help Stanford University graduates lower interest rates on their student loans. Today, most of the company’s $10 billion in loans are student debt refinances.
Other online lenders, including New York-based CommonBond Inc. and San Francisco-based Earnest Operations LLC, are also active in student refinancing. And traditional banks, such as Wells Fargo & Co. in San Francisco and Darien Rowayton Bank in Connecticut, have also expanded into refinancing student loans.
They all promise to lower interest rates between 2 and 9%. Current private student loan rates are between 2.5 and 12%, while the interest rate for federal loans is between 4 and 6%.
Companies have sprung up to help borrowers shop for student refinance rates and offers online, much like finding the best credit card deals. And employers are increasingly turning to private lenders to offer young workers refinance student loans.
Requirements for loans vary. Some require students to have graduated. Others want borrowers to have credit scores of 700 or higher, out of a maximum of 850, or want to know how much a potential candidate has in investment income and retirement savings.
While Citizens has no credit score requirement to qualify for refinancing and requires a minimum annual income of just $24,000, in a call with investors a few weeks ago, bank executives described the bulk of their borrowers as doctors, lawyers and business graduates. , who had credit scores between 750 and 780. Nationwide, only 16% of consumers under 30 have credit scores of 720 and above.
The income of a typical SoFi borrower was around $160,000, according to ratings agency Moody’s Investors Service, which is three times the median family income of 25-34 year olds of $53,500, according to the latest US Census data. .
Dan Macklin, co-founder of SoFi, said the company’s borrowers also come from humble beginnings, work and can benefit from savings.
“Our members are the hard-working ones,” Macklin said. “These are not people with silver spoons. They have debts.
Targeting high-end borrowers helps reduce defaults and ensures they can extend credit and attract investors to fund those loans, the lenders said. Lenders are also more at risk if a refinancer defaults. Unlike a mortgage arrangement, there is no house that lenders can foreclose on if the borrower is in financial difficulty.
“We really try to help as many customers as possible. In some situations, it’s not a prudent risk to take,” said Conner of Citizens. “It’s not a situation where we can help everyone.”
But for borrowers desperate for debt relief of up to $100,000 for an undergraduate degree, being disqualified can be devastating. For example, more than half of the borrowers that Urban Edge, a Roxbury-based community organization, advises on student debt have been in arrears. “A bad credit rating or poor student loan repayment history or short employment history are disqualifications,” said Alexsandria Connelly, the group’s student loan coordinator.
As more lenders enter the market, including public student loan authorities like MEFA, refinancing is likely to be accessible to a wider, more middle-class audience, said Stephen Dash, director general of Credible.com, an online marketplace for student loans. refinancing.
MEFA, for example, requires a minimum credit score of 670, although since the program launched earlier this year the median score has been 741.
Democratic presidential candidate Hillary Clinton has proposed allowing borrowers with federal loans to refinance at current rates through the government. This way, borrowers would not lose some of the protections of the federal loan program.
For now, borrowers should carefully weigh private refinancing, especially federal loans, and channel any discretionary income from gifts or their employment into paying off the loan as quickly as possible, said Kevin Fudge, chief financial officer. consumer advocacy at American Student Assistance, based in Boston.
“The irony is that the highest earners, who could pay off their debt regardless of the interest rate, are the ones who end up saving money and paying off their loan faster through private loan refinancing,” he said. said Fudge.
For Kelly Franco, 27, a Boston high school teacher, refinancing her private loans isn’t an option on her salary, expenses and debt of tens of thousands of dollars from undergraduate degrees and college degrees. graduate cycles. She has received some relief with income-tested reimbursement from the federal government and hopes to eventually qualify for some remission by working as a teacher, but her loans remain onerous. Franco pays $600 a month in student loans and fears he will have to keep paying for another 20 years and not be able to save enough to send his son to college.
“I wonder how other young families deal with this,” Franco said. “It’s difficult.”