(In the 9th paragraph, removes extra space in CommonBond)
By Liz Weston
LOS ANGELES, Sept 29 (Reuters) – People with federal student
loan debt now have a few options to lower their rates with
private consolidation loans, but consumer advocates warn they
could be giving up vital protections in doing so.
Royal Bank of Scotland Group Plcs Citizens
Financial Group recently expanded its student loan refinancing
program to include federal as well as private student loans. The
bank joins two much smaller, peer-to-peer lenders, SoFi and
All three lenders say they counsel potential customers about
the consumer protections lost when federal debt is refinanced
into private loans. Those protections include access to federal
income-based repayment and forgiveness programs as well as
generous forbearance and deferral options.
Those are very important rights, said Persis Yu, staff
attorney for the Student Loan Borrowers Assistance site run by
the National Consumer Law Center.
Yu questioned whether the borrowers targeted by these
lenders understand how vulnerable they are to financial setbacks
such as job losses.
A lot of people think theyre not ever going to default,
Yu said, but there are very high delinquency rates on student
So far the lenders are wooing the lowest-risk borrowers:
graduates with steady jobs, good credit and enough income to pay
down their loans.
CommonBond, which has refinanced about $100 million in
student loans so far, restricts its prospective clients even
further to those with business, law, medical or engineering
degrees, said Chief Executive Officer David Klein.
The lenders tout variable rates that start at less than 3
percent. Fixed rates can be as low as 3.6 percent at SoFi and
CommonBond, while Citizens lowest is 4.74 percent.
By contrast, current interest rates for new fixed-rate
federal Stafford loans are 4.66 percent for undergraduates and
6.21 percent for graduate and professional students. Borrowers
with older federal debt may have rates as high as 8.5 percent.
While the best rates on consolidation loans are reserved for
the most creditworthy borrowers, Citizens has been able to lower
its typical customers rate by 1.5 percentage points when
refinancing private loans, said Brendan Coughlin, the companys
president of auto and education lending.
A one percentage point decrease corresponds to annual
savings of about $50 per year on each $10,000 of debt, said Mark
Kantrowitz, publisher of Edvisors.com, a college finance
education site. The savings generally are not enough to make it
worth giving up income-based repayment and forgiveness options,
Borrowers who struggle to pay their debt are typically
locked out of refinancing due to lenders high underwriting
Were approached by people who are having a really
difficult time with their payments, said Mike Cagney, CEO of
SoFi, which so far has refinanced about $1 billion in federal
and private loan debt. Were not a good option for them.
PARENTS MAY BENEFIT
Parents who have federal PLUS loans, however, might consider
refinancing into a private loan if they can win a large-enough
interest rate reduction, Kantrowitz said.
Parent PLUS loans are not eligible for income-based
repayment options or forgiveness, although they still offer up
to three years of forbearance and deferral options. Private
consolidation loans typically offer up to one year of
Generally, refinancing federal parent PLUS loans into a
private consolidation loan might be financially beneficial if
the interest rate will decrease by at least two percentage
points and the borrower has at least $20,000 in (such) loans,
Students, on the other hand, should still not refinance
their federal student loans into a private consolidation loan.
Parents with the high credit scores and solid incomes
necessary for a private loan consolidation presumably would be
able to make informed decisions about the necessary trade-offs
between a lower interest rate and the loss of federal education
loan benefits, Kantrowitz said.
A proposal to lower rates on existing federal student loan
debt died this summer when Senator Elizabeth Warren, a
Massachusetts Democrat, failed to get the 60 votes needed to
advance her bill. The legislation, which would have allowed
people with federal and private loans issued before 2010 to
refinance at 3.86 percent, received 56 votes for and 38 votes
(Editing by Beth Pinsker and Lisa Von Ahn)