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Economic Implications of the Student Loan Refinancing Boom

05/11/2015 03:24 pm ET | Updated May 11, 2016

Student loan refinancing is bigger than ever, with an increasing number of lenders, banks, and credit unions getting in on this growing market. The idea is simple: when students initially take out their loans, they have weak credit scores and little to no income, but after they graduate, both their credit history and their income should be stronger, making them eligible for more favorable interest rates and terms.

While refinancing student loans is a fantastic option for some borrowers, it doesn’t help most individuals with student debt. In order to benefit from refinancing, borrowers must meet strict income and credit requirements that vary by lender. Aryea Aranoff, chief strategy officer of Darien Rowayton Bank Education Finance, one institution offering student loan refinancing said, “If you’re making less than $60,000 per year, it’d be hard to refinance with us or any other low-rate private lenders.” Citizen’s Bank, another top student loan refinancer, refinances student loans for borrowers with a credit score of 640 or above, while the average borrower refinancing through Social Finance Inc. has an income of $150,000 and a credit score of 770.

Mark Kantrowitz, Senior Vice President of Edvisors.com and creator of FinAid.org, summarized the situation well when he said, “A quirk of lending: The people who have the most difficult financial situations often get the highest interest rates. That makes it even more difficult for them to repay loans.”

As more lenders offer refinancing services and student loan refinancing continues to grow, there could be significant economic implications stemming from who qualifies for refinancing and who does not. Since the federal government does not offer student loan refinancing, the government will likely lose the most well-off borrowers to private lenders who do offer refinancing. Private lenders will compete for the top borrowers, while the government will be stuck with the poorest of the lot, creating a two-tiered system in the student loan industry.

According to The Boston Globe, “Some experts say the contrasting outcomes of rich borrower, poor borrower drive inequality in the United States.” The richer borrowers, with stable, high-income jobs who can refinance their loans, will benefit from lower interest rates and shorter loan terms, ultimately reducing their overall loan cost. This will free up discretionary income for the richer borrowers, allowing them to buy homes sooner, save for retirement, and set aside money for their own children’s education. In other words, those who can refinance will get ahead, while borrowers with lower credit scores and lower income will continue to be strapped with debt for years to come.

Senator Elizabeth Warren has attempted to alter this system by allowing federal student loans to be refinanced and raising taxes on millionaires to pay for it. Though her attempts have been thwarted so far, she has said, “We’re gonna have to keep hitting at this.” As refinancing becomes more prevalent, emerging lenders are offering niche products to expand the refinancing market to a broader range of borrowers. Additionally, cosigners have become a great way for average borrowers to receive stronger refinancing offers. With the expanding market and student loans high in political discussion, we will likely see a magnitude of economic effects as a result of the refinancing boom.

If you are interested in seeing if you can benefit from refinancing, check out Credible to see how your rates compare.