How 8 million Americans could lower the interest rates on ...

[Pages:20]2016 Credible Student Loan Refinancing Report

How 8 million Americans could lower the interest rates on their student loans

November 2016

2016 Credible Student Loan Refinancing Report 16

Table of contents

Introduction

01

Key takeaways

02

Student loan refinancing strategies

03

How different borrowers approach student loan refinancing

05

Getting the biggest savings

06

Reducing monthly payment

08

Who is a good candidate for refinancing?

09

How borrowers can become better candidates for refinancing 10

Charts

12

Methodology

15

Appendix

16

2016 Credible Student Loan Refinancing Report

Introduction

In a March 2015 report, Goldman Sachs estimated that $211 billion in student loans could qualify for refinancing at lower interest rates. Using the same methodology employed by Goldman Sachs analysts, Credible estimates the volume of student loans ripe for refinancing has grown to $242 billion.*

With the average federal student loan borrower owing about $30,000, more than 8 million Americans could be eligible to lower the rates on their student loans by refinancing them with a private lender.**

But many borrowers seem to be unaware that student loans can be refinanced. A recent Citizens Bank survey found more than half of student loan borrowers haven't even looked into refinancing.

Among borrowers who have heard of refinancing, there may also be perception that it's only an option for graduates with six-figure incomes and flawless credit.

*(*) Click to go to Appendix for details

In fact, an analysis of borrowers who used the Credible marketplace to refinance student loan debt in the last 1 ? years shows that refinancing is benefiting a broader range of borrowers.

This Credible Insights report, the latest in a series, provides an unprecedented look at the refinancing strategies employed by different groups of borrowers and the results they achieve, examines who is a good candidate for refinancing, and identifies steps that borrowers who don't qualify for refinancing today can take to improve their prospects.

Because borrowers can use Credible to see rates offered by multiple lenders, our user data provides a more complete picture of who is refinancing student loans, and how they benefit, than an analysis of an individual lender's practices.

Credible will produce this report on student loan refinancing strategies and outcomes on an ongoing basis.

2016 Credible Student Loan Refinancing Report 1

Key takeaways

Click on a key takeaway for a more detailed analysis:

? Across all groups, borrowers who refinanced into a loan with a shorter repayment term reduced their interest rate by 1.71 percentage points and can expect to pay $18,668 less over the life of their new loan, on average.

? Nearly six in 10 borrowers (59 percent) refinanced into a fixed-rate loan. Borrowers refinancing into a loan with a shorter repayment term were more likely to choose a fixed-rate loan.

? Recent graduates 27 and younger are refinancing student loan balances ($49,304) that are nearly as large as their annual salaries ($50,053).

? Recent graduates were the most likely to refinance into loans with longer repayment terms -- a strategy favored by borrowers who are primarily interested in lowering their monthly payments. Recent graduates refinancing into loans with longer terms knocked $221 off their monthly payments, on average.

? Borrowers with six-figure student loan debt were the most likely to refinance into loans with shorter repayment terms, helping them obtain the lowest interest rate and maximize overall savings. Highdebt borrowers who took this approach can expect to save an average of $50,690 over the life of their new loan.

? Interest rate reduction: Borrowers 50 and older, who had higher incomes but lower student loan balances than the group as a whole, obtained the largest interest rate reductions -- 2.34 percentage points, on average, when refinancing into loans with shorter repayment terms.

2016 Credible Student Loan Refinancing Report 2

Across all groups, borrowers who refinanced into a loan with a shorter repayment term reduced their interest rate by 1.71 percentage points and can expect to pay $18,668 less over the life of their new loan, on average.

Student loan refinancing strategies

While borrowers exploring student loan refinancing are typically seeking a lower interest rate, they also have to choose a loan with monthly payments that fits their budget. Monthly payments are determined not only by the loan's interest rate, but its repayment term.

The standard repayment term on government student loans is 10 years. Private lenders who refinance student loans typically offer a choice of repayment terms, including 5, 7, 10, 15, and 20 years.

The longer the loan repayment term, the smaller the monthly payment, and the higher the total

repayment cost. Borrowers who are primarily interested in reducing their monthly payment often refinance into loans with longer repayment terms than their existing debt.

Loans with shorter repayment terms will require higher monthly payments, but cost less to repay. Not only do borrowers pay their loans off faster when refinancing into a loan with a shorter repayment term, but they can often get a better interest rate. That's because the shorter the loan term, the lower the interest rate generally offered by most lenders.

2016 Credible Student Loan Refinancing Report 3

Overall savings ($) Change in monthly payment ($)

Student loan refinancing strategies (cont.)

Borrowers using the Credible marketplace to refinance student loan debt were almost evenly split on which strategy to employ -- 51 percent refinanced into loans with shorter repayment terms, while 48 percent picked loans with longer terms.

It's important to note that in many cases, borrowers refinancing at a lower interest rate can reduce both their monthly payment and the total amount repaid. This is likely to be the case when borrowers choose a loan with a repayment term that's about the same length as the repayment term of their existing loan.

All users

Recent graduates < 27 years old

Borrowers 28-40

years old

Borrowers with high debt

$100K+

Borrowers 50+

years old

Overall savings (LHS)

Change in monthly payment (RHS)

Looking at all borrowers regardless of the refinancing strategy they chose, the group as a whole reduced their loan repayment term by an average of 6 months and cut their interest rate by 1.56 percentage points, achieving an overall savings of $7,747 with a $25 reduction in monthly payment.

2016 Credible Student Loan Refinancing Report 4

How different borrowers approach refinancing

We segmented our borrowers into four groups:

Recent graduates 27 years old and under

"Mid-career" graduates 28-40 years old

High-debt borrowers who refinanced more than $100,000 in student loans

Borrowers 50 years old and older

? Borrowers who refinanced into a loan that increased their repayment term can be seen as being primarily interested in reducing their monthly payment.

? Borrowers who decreased their loan term were looking to get the lowest interest rate and maximize total savings.

Borrowers seeking to maximize their savings refinanced into loans that reduced their repayment terms by 59 months - nearly 5 years - and increased their monthly payments by $151, on average. They reduced their interest rate by 1.71 percentage points on average, and can expect to save $18,668 over the life of their loan.

2016 Credible Student Loan Refinancing Report 5

Getting the biggest savings

Overall savings ($) Change in monthly payment ($)

High-debt borrowers who reduced their loan repayment term achieved the greatest overall savings ($50,690) of any group, due to their higher average loan balances ($144,335) and the fact that they reduced their repayment term by 69 months. To achieve those savings, high-debt borrowers were willing to ramp up their monthly payments by an average of $344.

All users

Recent graduates < 27 years old

Borrowers 28-40

years old

Borrowers with high debt

$100K+

Borrowers 50+

years old

Overall savings (LHS)

Change in monthly payment (RHS)

Population (reduced term) All users

Term change -4 yrs, 10 mo.

Change in interest rate

-1.71%

Overall savings

$18,668

Change in

Average

monthly payment income

$151

$89,127

Average loan balance

$56,202

Recent graduates < 27 years old -3 yrs, 11 mo. -1.90%

$15,142

$117

$59,762

$49,358

Borrowers 28-40 years old

-5 yrs, 2 mo.

-1.55%

$19,523

$167

$90,573

$59,841

Borrowers with high debt $100K+ -5 yrs, 9 mo.

Borrowers 50+ years old

-4 yrs, 11 mo.

-1.52% -2.34%

$50,690 $21,998

$344 $126

$131,914 $113,822

$144,335 $54,455

Source: Analysis of student loans refinanced by borrowers using the Credible marketplace from April 15, 2015 to Sept. 21, 2016.

2016 Credible Student Loan Refinancing Report 6

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download