Student-Loan Report Prompts Calls for Refinancing Options

Frustrated borrowers with private student loans have often said they feel trapped in their debt, struggling with high monthly payments and few options to ease the burden. Their concerns received backing from a report released on Wednesday by a federal consumer-protection agency.

The report, issued by the Consumer Financial Protection Bureau, calls for more flexible repayment options and a refinancing market for private student loans.

In the report, the agency analyzes the more than 28,000 comments it received about the difficulties faced by many borrowers with private student loans. The rising amount of student debt can have a “domino effect” on society because high monthly loan payments can deplete a borrower’s savings, making him or her less likely to buy a home or make other financial decisions that could help fuel the economy, the report says.

The report suggests a number of policy options to provide relief for borrowers, including creating a refinancing market for private student loans and working with loan servicers to create more negotiable repayment plans.

“Even if such a program required public funds, or a sharing of the cost between the public sector and the owners of the loans, the economic benefits of facilitating restructuring activity at scale might outweigh program costs,” the report says.

When borrowers take out loans, they typically do not have a strong credit history, or may have to rely on the credit score of a parent to qualify for a loan—even if that person’s credit score is also low. The situation can result in a loan with a higher interest rate. But students who graduate and find a job are often unable to refinance at a lower rate, even though their credit score may have improved.

One company that has worked with the consumer-protection bureau is already giving borrowers those options.

SoFi is an online lending pool that connects student-loan borrowers to alumni of their colleges and universities. SoFi has secured money from alumni at 78 colleges across the country that it uses to issue new loans and to refinance existing loans.

According to Mike S. Cagney, a co-founder and the chief executive officer of SoFi, more than three-quarters of the company’s lending—85 percent of $100-million last year—was in refinancing.

Once a borrower applies online to refinance his or her loans, SoFi approaches the current holder of the loan, pays it off, and issues a new one at a lower interest rate.

“If you get someone who has completed school and is employed, they have a very different credit profile than when they started,” Mr. Cagney said.

But he said that, in addition to providing a refinancing market for private student loans, policy makers and institutions needed to focus on increasing financial literacy among borrowers. A large source of the problem with student debt is that some borrowers take out more loans than they need, or that they would be able to repay, he said.

“If your expected compensation after graduating is $30,000 per year,” Mr. Cagney said, “you can’t take out $100,000 in loans.”

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