Financially Fit in 5

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College Bucks : Disruption & Innovation in Student Loan Debt Market

Student loan debt reached $1.2 trillion dollars in 2014. Annually, $10 million of Federal Student Loan debt is taken out by students each year. Approximately seventy-five percent of all students who graduate from a 4 year college have student loan debt, and somewhere in the neighborhood of 40 million Americans are currently paying off student loans.

The numbers are staggering and the marketplace is in need of change. The average interest rate for those paying off their loans is 6.8%. Keep in mind that most banks are paying less than 1% interest on savings accounts.

It’s the spread between what students are paying (6.8%) and what you can earn in the bank (>1%) that creates the opportunity. So if you are a bank lending money at 6.8% and paying out in interest under 1%, you are making 5%. In a $1.2 trillion dollar market, that’s quite the profit.

As a result, there are several companies which have come into the market to reduce the spread in the student loan debt arena by creating a peer-to-peer lending platform. These companies match students who want to refinance their student debt to a lower interest rate with those investors who are looking for an alternative, safer investment with higher returns than a CD savings account. The two most notable companies offering these programs are CommonBond and SoFi.

The bad news is that these companies are only allowing certain school majors and certain college and post-college graduates into the “club.” These student loan refinance plans are specifically looking for students who have an extremely low chance of default which is determined not only by their credit history but also by the student’s choice of major and college attended. Recently, Forbes magazine published an article entitled “The $1 Trillion Opportunity” which gives an in-depth look at this new marketplace. If you are interested, here’s the link

The take away here is to know about these programs, do your research and apply if you think you qualify, and, if you are not eligible, to watch out for changes. Keep in mind that this is a trillion dollar market, and there is room for expansion – different groups of college majors and additional colleges. If you think you might be a good candidate (good earning potential and excellent creditworthiness) for one of these re-finance programs, you can always call and ask if you can apply. If you know someone with student loan debt who might benefit from knowing about these programs, pass this blog along to them

If you are wondering if there are peer-to-peer lending companies outside the student debt market, the most notable is the Lending Club

Thanks for taking the time to read this edition of Financially Fit in Five. The LC Group is a daily money management firm.  We can assist with financial education, organization, bill pay, and budgeting.