Student Lenders Test Refinancing Waters

By Staff

With student loan debt at record levels and a jump in interest rates last year, the notion of refinancing student loans has come back into the light. At the same time, lawmakers are proposing measures that would help to relieve the crushing debt burden that some graduates now face.

So far, just one bank has proposed allowing borrowers to refinance their student loans – RBS Citizens Financial Group – and Discover will begin allowing loan consolidation, which can yield lower interest rates, later this year.

The moves come as lenders are giving out more in student loans to borrowers who meet tighter credit standards–and as lawmakers and regulators are increasing pressure on lenders to help borrowers saddled by private student loans.

Refinancing dried up during the credit crisis, when demand for education loans packaged into securities largely disappeared and banks deemed the debt too risky to hold on their books. By the end of last year, only a handful of large lenders offered refinancing, down from about a dozen in 2006, said Mark Kantrowitz, a senior vice president at Las Vegas-based, which tracks student loans.

Refinancings accounted for less than 5.5% of new private student-loan volume during each of the past five academic years, according to MeasureOne, a San Francisco-based firm that tracks the student-loan market.

Last month, officials in the Treasury and Education departments and the Consumer Financial Protection Bureau met with lenders to discuss ways to help struggling borrowers, including loan modification and refinancing.

“When interest rates are low, homeowners refinance their loans, businesses refinance their loans; this is an opportunity for students to do the same,” Sen. Elizabeth Warren (D., Mass.) said in an interview with the Wall Street Journal. She said she plans to introduce legislation in the coming weeks that would allow millions of borrowers to refinance federal and private student loans into the federal loan program.

Refinancing allows a borrower to get a lower interest rate on the loan, in some cases in exchange for a fee. It also often involves consolidating all of one’s private student loans into one new loan with a new rate and terms.

Until recently, lenders were reluctant to offer refinancing because of concerns that it attracted many troubled borrowers who might soon default, Mr. Kantrowitz said. Refinancing also often was used by borrowers whose cosigners wanted out of the loan, which lessened the chances that lenders would be paid in full.

But as loan performance improves, banks are looking at student-loan borrowers as potential lifelong customers who might need other loans and banking products. Lenders that offer refinancing stand to take away borrowers from banks that don’t provide this service.

Lenders also see refinancing as a way to go after the best pool of borrowers–those who have graduated college, are employed, have never missed payments on their loans and have a high credit score or a cosigner with one. While agreeing to a lower interest rate isn’t ideal for lenders, it is considered a better option to losing a loan from a top-performing borrower to a competitor.

Some credit unions that have been refinancing for years have been trying to take market share away from larger lenders. Other lenders are trying to take away market share from the federal government by offering to refinance federal student loans into private student-loan debt. Social Finance, a San Francisco-based student-loan refinancer that launched in 2011, expanded its services in November to graduates from most colleges, up from 100 schools. Beyond private loans, it also refinances federal loans into one new private loan for borrowers.

But student loan giant Sallie Mae (SLM Corp.), which will soon split into two companies – one bank, still called Sallie Mae, devoted to private student lending and a nonbank unit that handles loan servicing and collections – doesn’t seem eager to wade into refinancing. Jack Remondi, Sallie Mae’s president and CEO, indicated to Morning Education that he doesn’t see much opportunity in that arena. Federal loans are already made at below-market rates (even when interest rates were higher than they are now), and private loans have variable rates that depend on a parent or other cosigner’s credit score, which is less likely to change over the life of the loan. “The refinancing doesn’t really create a lower cost option for customers,” he said.

Meanwhile, as I noted above, Sallie Mae’s servicing branch is changing its brand. The loan servicer formerly known as Sallie Mae will now go by Navient, and it’s expected to service about $300 billion in student loans. The company has seen an uptick in regulatory inquiries. Those open investigations will transfer over. “It’s designed to separate the company into what is becoming increasingly distinct business models and objectives,” Remondi said. “Navient is much more focused on servicing and processing and doing so for institutional clients like the Department of Education. Sallie Mae will be focused on originating private education loans.” Federal Student Aid said it expects the effect of the change to be minimal.