Why are we talking about student loans right now?
An interesting analysis shows that shopping around is a good thing for student loan holders willing to do their homework. I did some research to get the full story for our listeners and to provide some tips for those who may be able to benefit from the findings of the analysis.
Let’s start with some background. What is the state of student loans in America right now?
Student loan debt in America continues to grow. Numbers from the New York Federal Reserve indicate that student loans currently make up 11% of a total U.S. debt balance of nearly $13 trillion. If you do the math, that comes out to around $1.4 trillion in student loan debt –about $620 billion more than the total U.S. credit card debt.
Those college students who graduated in 2016 have an average of $37,172 in student loan debt, up six percent from last year. Even while overall debt levels fell in the wake of the great recession, student loans have been growing as a proportion of overall debt, while housing debt has fallen.
One Pew research employee noted that the level of student debt reached at the end of June 2017 is two-and-a-half times higher than it was in 2007. Student debt continues to be a concern, and because more and more Americans are going into debt, it is something more and more Americans will have to grapple with.
How can shopping around for a student loan help?
Well, the article was based on an analysis of rate requests submitted by students and their families through the Credible marketplace. Credible is a company that allows borrowers to compare offers on student loans, student loan refinancing, and personal loans. The data showed competition between lenders can produce positive financial outcomes for borrowers.
Specifically, the analysis found that when borrowers pre-qualified with more than one lender, the average difference between the high and low-interest rate on 10-year, fixed-rate loans was 1.7 percentage points; that borrowers who chose the lowest interest loan could expect significant savings; and that private student loans funded through the Credible marketplace so far this year have interest rates that can be competitive with federal plus loans.
In other words, by simply asking for offers from more than one lender, borrowers improved their chances of getting a lower interest rate. And as you know, rates can make a big difference in your total payout, whether it is a car, a home and a student loan. Take a fixed-rate $15,000 loan. That 1.7 points difference in interest rates would yield a savings of roughly $2,769 over 10 years, which a significant chunk of cash that could be invested or used to pay down other debt.
Is there a catch here?
There always is. First, these findings are based on borrowers having good or great credit. If you don’t have strong credit, interest rates can soar into the double digits. On top of that, private loans often lack some of the flexibility that federal loans have. Take your repayment schedule: while federal loans offer a grace period after graduation, private loans often do not.
Private loans also tend to have shorter repayment periods and more stringent payment terms. Say you are having difficulty making payments. Federal loans offer more options than private lenders to lower your payments. You can defer your loan payments for up to three years, or you may be able to extend the payment schedule.
Private loans typically don’t offer either of these options.
So are the benefits of shopping around just too good to be true?
Not at all. If you have good credit, stable employment, and some savings that can cover your student loan payments if you do have a spell of unemployment, lowering your interest rate can be a very good way to save money. The most important thing is simply to make sure you do your homework and read all of the fine print before you jump at a private loan or a private loan refinancing option.
Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
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