Not Comparing Rates on Student Loans Can Cost Thousands
Not checking rates with multiple lenders can cost families taking out private student loans thousands of dollars in repayment costs, according to an analysis by student loan marketplace Credible.
Borrowers requesting rates through the Credible marketplace in June benefited from the competition for their business. Among those who prequalified with more than one lender:
- The average difference between the high and low interest rate on 10-year, fixed-rate loans was 1.68 percentage points.
- Choosing the loan with the lower interest rate would put students on track to save $3,922.
- Rates on private student loans were competitive with federal PLUS loans.
Credible’s integrations with lenders and credit bureaus allow borrowers to submit a single form to request prequalified rates from multiple lenders.
Potential savings when borrowers prequalify with more than one lender
|Loan type||Average difference, high and low rate||Interest savings|
|10-year fixed rate||2.08%||$4,690|
|10-year variable rate||1.99%||$4,376|
|15-year fixed rate||1.74%||$5,953|
|15-year variable rate||2.20%||$7,420|
Source: Rate requests submitted through the Credible marketplace in June 2019. Savings based on median loan request of $20,000 with payments deferred for 2 ½ years. Savings calculation for variable-rate loans assumes rate does not change.
When borrowers prequalified with more than one lender, the difference between their high rate and low rate averaged 1.15 to 1.68 percentage points, depending on the loan repayment term and interest rate type (fixed or variable).
That represents a savings of between $3,472 to $5,189 for borrowers paying back median loan balances of $20,000 over 10 or 15 years.
Private student loans vs. PLUS loans
Credible’s analysis also showed that rates on private student loans can be competitive with federal PLUS loans. PLUS loans, which are available to graduate students and parents of undergraduates, are the costliest federal student loan.
Families taking out PLUS loans during the 2019-20 academic year will pay 7.08% interest. After factoring in the 4.248% up-front fee, the APR on PLUS loans can be around 8%.
Because Congress hasn’t increased loan limits on more affordable federal loans in more than a decade, students are increasingly dependent on PLUS loans (see, “Why students turn to private loans.”)
But Credible’s analysis found many families can qualify for better rates on private student loans — particularly when they apply with a cosigner. Among students requesting rates on private student loans with a cosigner, Credible found:
- 39% prequalified for 10-year, fixed-rate loans at less than 7% interest
- 51% were eligible to take out 10-year, variable-rate loans at less than 7% interest
Comparing rates with the right cosigner
Unlike federal student loans, which offer “one-size-fits-all” pricing, rates on private student loans are determined by the creditworthiness of the borrower and, in most cases, the cosigner.
Because first-time college students typically lack the credit history needed to qualify for a loan on their own, more than 90% of private student loans made to undergraduates are cosigned by a parent, relative, or friend.
The Credible marketplace allows students to compare different cosigners to see which one can help get them the best rate. The higher the cosigner’s credit score, the lower the rates the student may prequalify for.
While borrowers with low credit scores got the biggest improvement in interest rate by adding a cosigner, the benefits are seen across the credit spectrum. The chart above demonstrates that when students have a cosigner with a credit score in the low 700s or higher, they’re in a good position to prequalify for loans at rates below the 8% APR on PLUS loans.
On rate requests for 10-year fixed-rate loans, cosigners had an average credit score of 776, while the average FICO score of borrowers applying without a cosigner was 759.
Why students turn to private loans
Students typically turn to private student loans after they’ve exhausted grants and scholarships and hit their limits on the most affordable federal student loans.
Congress hasn’t increased federal loan limits in more than a decade. In the meantime, the average cost of college has increased by almost 30% at public universities and 10% at private nonprofit schools.
That means that more students are at their limits on the more affordable federal student loans, leading them to turn to federal PLUS loans or private student loans to fill college funding gaps.
Annual student loan borrowing peaked in 2010-11 at $127.7 billion and has declined for seven years in a row to $105.5 billion during the 2017-18 academic year, according to inflation-adjusted data compiled by the College Board.
Over that time, annual issuance of the most affordable federal student loans — primarily subsidized and unsubsidized direct loans — fell by 29% to $70.8 billion.
But during the same period, annual PLUS loan borrowing grew by 17% to $23.1 billion. Private student lending grew at an even faster pace, increasing by 36% to $11.6 billion.
Who turns to private student loans
According to MeasureOne, a consortium of private lenders, undergraduate students and their families took out 89% of private student loans during the 2018-19 academic year. Only 11% of private student loans were made to graduate students, reflecting higher federal borrowing limits.
Because they lack earnings and credit history, undergraduates typically need a cosigner to qualify for a private student loan. MeasureOne reports that 92% of private student loans taken out by undergraduates were cosigned, compared to 63% of loans to graduate students.
Among borrowers using the Credible marketplace, most loans (86%) are cosigned by a parent. Another relative acts as a cosigner 6.5% of the time, followed by a spouse (2.9%), guardian (1.9%), sibling (1.2%), or friend (0.8%).
Rate request data is for the period from June 1, 2019, to June 30, 2019. Not every prospective borrower who requests rates through Credible will receive prequalified rates, and not all borrowers who prequalify will get offers from multiple lenders. Among prospective borrowers requesting rates with a cosigner in June 2019, 48% prequalified for a loan from at least one of Credible’s partner lenders. Within that group, 78% prequalified with more than one lender. Among borrowers who requested rates without a cosigner, 8% prequalified, and 56% of that group prequalified with more than one lender.
Credible is a multi-lender marketplace that empowers consumers to discover financial products that are the best fit for their unique circumstances. Our integrations with leading lenders and credit bureaus allow consumers to quickly compare accurate, personalized loan options ― without putting their personal information at risk or affecting their credit score. The Credible marketplace provides an unrivaled customer experience, as reflected by over 2,000 positive Trustpilot reviews and a TrustScore of 9.5/10. Credible (CRD.ASX) is listed on the Australian Securities Exchange (ASX).
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