Student loans are an incredible problem in the United States. Today, $1.2 trillion in student loan debt is held by college graduates nationwide. If you graduated in the class of 2015, odds are you graduated with student loan debt. The rising costs of higher education, alongside easy access to financing, has made student loans a common tool for paying for college.
Student loan lenders have a unique business model and these lenders (including the Federal Government) will provide unsecured financing to 18-year-old college students with little in terms of credit history. This creates a moral hazard because these young naive borrowers are saddled with a lifetime of debt often without understanding the ramifications. Therefore the "student loan problem" in the United States is not going away anytime soon. This is because student loans are unlike most other debts, including foreclosures and credit card debt, and cannot be discharged through bankruptcy.
Let's face it, student loans are holding Americans back. They are holding Americans back from making entrepreneurial choices, pursuing marriage and ultimately reaching their full economic potential. Moreover, America spends more on education per capita than any other advanced economy, yet is ranked only 36th. With Millennials growing as an economic and political force, whoever wants to win the White House in 2016 should start talking about this issue as a core priority.
But can the market devise a solution? Over the last few years, we've seen a number of new student loan refinance lenders enter the market looking to change perceptions and save student loan borrowers money. Student loan refinance is a newer concept. As the names suggest, borrowers can refinance student loans to a lower rate. Student loan refinance rates start below 2 percent and both federal and private student loans can be refinanced. For borrowers paying 9 percent on private student loans, refinancing at rates as low as 2 percent can be a blessing.
Increased competition by non-traditional student loan refinance lenders like SoFi, CommonBond, and LendKey are proving to be popular. Credit unions have even started to get into the student loan refinance market. In addition there is LendKey, a technology company which matches student loan refinance applicants to an expansive network of local credit unions. In fact, the student loan refinance industry is an example of how finance can be used as a force for good. Some of the financiers and peer-to-peer lenders are having demonstrable, measurable and positive social impact alongside financial returns.
There are even a number of companies who allow borrowers to compare all of these student loan refinance lenders. LendEDU is a unique startup working to build transparency in the student loan markets effectively creating an expedia for student loans. The company's student loan refinance marketplace allows borrowers to get quotes from all the top student loan refinance lenders including SoFi, CommonBond, and LendKey. Importantly, LendEDU also focuses on educating students with a number of vital guides, reviews, and financial literacy resources.
The student loan refinance industry is certainly reshaping the entire student loan industry as we know it. Indeed there is greater importance is being put on the borrower through low rates, no fees, transparency, real customer support, and unique borrower protections. All of these companies have been funded by outside investors. These investors are surely looking for a return, but in the process are using finance as a force for good themselves.
However, student loan refinance is not an option for everyone. Unlike the Department of Education, student loan refinance lenders approve applicants based off credit worthiness. In general, student loan refinance lenders have some pretty strict criteria including a great credit score (700+), low debt-to-income ratio, and annual income over $75,000. That being said, each lender is different and you may be approved at one lender and not the other.
Student loan refinance is an interesting and emerging industry and many of the new companies looking to gain market share have refocused on the borrower. These student loan refinance companies are bravely taking one of the most unloved industries, the student loan industry, and transforming it by using dynamic problem-solving, technological innovation and finance as a force for good. It is too soon to tell if the traditional lenders will begin to enter this market, but with $1.2 trillion in student loan debt outstanding, there is a lot of money to be made in the refinance market by enlightened participants with the right motivation.
If you are lucky enough to get approved for student loan refinance, you will likely be able to save yourself quite a bit of money over the life of your loan. This means providing the opportunity for Americans to allocate capital to more productive investments, consumption and lifestyle choices. Ultimately, this comes down to getting young Americans at the bottom of the economic pyramid out of the J-Curve and back to economic prosperity. This will benefit all Americans, and a strong American economy is good for the entire world.
Jeremy K. Balkin is author of the new book Investing with Impact: Why Finance is a Force for Good.
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