Editor’s Note: This article was first published on December 16, 2017. It has been updated to include new information about minimum accepted credit scores.
The financial records provided by student loan refinance companies to investors contain some very interesting information.
Many student loan refinance lenders elect to make loans available to outside investors. From the perspective of the borrower, the loan terms and servicing do not change, but the profits and the risk of default are passed on from the lender to the investor. This is called loan securitization.
In order to get outside investments, the student loan lenders need to share information regarding average credit scores, income, education levels, and repayment terms. For student loan borrowers considering refinancing, this can shed some light on the refinance process.
The limitation of this data is that only certain loans are made available to investors. Lenders may make the majority of their loans available to investors or they may only offer a small portion. What we do know for sure is that lenders will want to make the investment look as appealing as possible, so the optimal loans to include will likely be those with high borrower incomes and high interest rates. As a result, the data provides a peak into student loan refinancing, but a somewhat limited view.
Nonetheless, seeing how lenders and investors look at student loan borrowers can be illuminating.
Recent loan securitization data shows the following:
|Lender||Loan Balance||Interest Rate||Repayment Length||Credit Score||Income|
|Laurel Road||$120,740||5.31%||13.5 Years||765||$189,050|
“Average Borrower” Takeaways
- The average credit score is in the good to very good range, meaning lenders are not focusing exclusively on those with excellent credit.
- By using weighted averages, lenders are able to make borrower incomes seem as high as possible to perspective investors.
- The average interest rate for all four companies listed is extremely close. For this reason, perspective refinance borrowers are better off focusing on the actual rates offered by lenders rather than the lowest advertised rates. This is part of the reason lenders with the lowest advertised rates are not necessarily the highest rated lenders in our refinance rankings.
- The data focuses on graduate borrowers with higher debt levels, higher incomes, and on longer repayment plans.
Information Not Available
The credit scores and incomes on the low end of the spectrum don’t do much to tip the scales. This is because a few doctors with medical school debt and doctor incomes can bring the numbers up very quickly. Especially in the case of weighted averages. As a result the data is far more representative of student loan refinancing for a doctor than what it is for the average borrower. In fact, the majority of the borrowers in the available data had graduate degrees.
It is also worth noting that the information make publicly available to investors applies only to loans that were part of the securitization process. When the loans are securitized, nothing changes from the perspective of the borrower, but the risk of default and the profits from interest shift from the lender to the investor. We know lenders offer loans to borrowers with much lower incomes and lower credit scores, so the data available to investors would indicate that many of these loans are not included in the securitization process. We also know that many refinance companies accept borrowers with much lower credit scores.
The Moral of the Story
The information provided to perspective investors is perhaps the most detailed data on student loan refinancing. Unfortunately, there are a number of major limitations to this information, so it is difficult for the average borrower to know how any particular lender might view them as an applicant.
As a result, even with the best information available, it is nearly impossible to know which specific lender will offer the best rate. For borrowers to secure the best rate, shopping around with a number of different lenders is essential.