A growing number of lenders are giving borrowers of student loans the chance to lower their interest payments through refinancing. The trend is developing as lenders are also giving out more to students who meet tighter credit standards. Lawmakers and regulators are also putting more pressure on lenders to help borrowers with private student loans.
Officials in the Treasury and Education departments and the Consumer Financial Protection Bureau in January met with lenders to discuss ways to help struggling borrowers. Proposed ideas included loan modification and refinancing. Sen. Elizabeth Warren (D-Mass.) said she plans to introduce legislation that would allow millions of borrowers to refinance federal and private student loans into the federal loan program.
With refinancing, a borrower can get a better interest rate on the loan, sometimes in exchange for a fee, and may consolidate all private student loans into one new loan with a new rate and terms. Lenders have been reluctant to offer refinancing out of fear that it would attract distressed borrowers who might soon default. It also has been used by borrowers whose cosigners wanted released from the contract, lowering the odds that lenders would be fully repaid.
Improving loan performance, however, has banks now seeing student loan borrowers as potential lifelong customers who might need other banking products and more types of loans. Refinancing also could be a way to target the best borrowers: college graduates who are employed, have never missed loan payments, and have a high credit score or a cosigner with one. Agreeing to a lower interest rate may be a better option for lenders than losing a loan to a competitor. Some lenders are trying to take away market share from federal loans by offering to refinance government student loans into private student loan debt.