Graduates of some of the top schools in the country have surprised lenders. In the past, Ivy League borrowers were considered the cream of the crop for lenders because of their low default rates. Today, lenders are less enthusiastic about these borrowers because these loans have become less profitable than expected.
How are these grads limiting lender profits? They are paying the loans off early. An article in the Wall Street Journal found that Ivy League graduates are paying upwards of 30% more than owed on their loans. By comparison, most federal borrowers are paying 4 to 6% more than what they owe.
More than just paying extra…
The approach used by these savvy borrowers goes beyond just paying a little extra each month. Many of them are refinancing with private lenders. These lenders, such as SoFi and CommonBond, offer rates starting in the 2 to 3% range. This allows borrowers to reduce interest rates dramatically. Because these lenders do not charge loan origination fees, borrowers can bounce around from one lender to the next, constantly looking for lower interest rates.
The idea of shopping around for lower interest rates may seem like a huge hassle, but there is real money to be saved. Suppose you have $30,000 in student loans at an interest rate of 8%. If you could find a lender willing to refinance the loans at 4%, you would save $1200 per year in interest alone.
A Strategy for more than just the Elite
Graduating from Harvard or Yale probably makes paying extra on your student loans a little easier. However, the ability to refinance and pay extra isn’t something that is reserved exclusively for the elite schools. In fact, it has never been easier.
Back in 2013, when this site first started, refinancing services were extremely limited. Interest rates were higher than what they are today, and most lenders required borrowers to have gone to specific schools or had specific degrees. Today, we are able to maintain a huge list of lenders, most of whom will lend to graduates from any school. If you have a decent credit score and income, there are plenty of options.
The Danger in the Harvard Approach
The idea of being aggressive and limiting lender profits sounds very appealing, but it isn’t for everyone.
This is especially true for borrowers with federal loans. Unlike private loans, federal loans come with perks like income-based repayment and student loan forgiveness. These are significant protections to have in place in the event of a job loss or other hardship. If you think you might need to one day take advantage of the “federal perks,” refinancing can be a mistake.
Another thing to keep in mind is the opportunity cost. At a certain point, a borrower is arguably debt-averse to a fault. If you are able to secure a loan at 2%, is it that important to be aggressive paying it back? Many conservative investments can offer returns at a higher interest rate. If the choice is between paying off your loan aggressively or investing the money, it is possible investing the money will leave you better off in the long run.
On the other hand, aggressively paying off the loan is far better than just leaving the money sitting in a bank account earning next to nothing in interest. The key to this point is getting interest working for you instead of against you. Find the lowest interest rate you can for your loans and then decide whether your extra payments should be invested or applied to loans.
A Final Thought
The numbers say that Ivy Leaguers are paying off their student loans far more aggressively than the rest of us. Is it because they make more money, or is it because they are just being smarter about their student loan options?
The answer is probably a little bit of both.