Preventing America's Next Crisis: Unmanageable Student Loans

With over $1.2 trillion of student loans currently owed by American students, graduates and parents, it is no surprise that many are seeking new ways to help manage repayments on these loans.

Short term relief can be found for some with federal programs that allow borrowers to postpone their repayments, but without timely repayments, many of these loans won’t be retired by their expected maturity dates.

Historically, student loans have been considered a low-risk investment for lenders; borrowers were investing in their education, and were expected to obtain employment with stable salaries, allowing them to service and manage repayments on their student loans.

In May 2015, it was reported that the average student loan default rate fell to 1.4% from nearly 2.0% in 2013, suggesting that student loan borrowers were improving their loan performance.

However, rather than improving repayment profiles, it appears that borrowers are increasingly using income-driven repayment plans to delay their financial obligations, which has been encouraged by the Obama administration.

This presents a problem for investors that hold securities created by the securitization of these student loans (which are government guaranteed) because the securities may not be retired by maturity. As a result, credit agencies Moody’s Investors Service and Fitch Ratings have announced that they are reviewing their recommendations on over $40 billion worth of student loans, potentially re-rating the securities backed by these student loans to junk status.

Predictably, lenders and investors may pull back from the student loan financing market and allocate their capital to alternative investments if this re-rating occurs. A smaller supply of capital for financing student loans could lead to higher interest rates for the average borrower, which could lead to higher loan repayments or even longer pay-off periods.

What You Can Do

To ensure the ongoing health of the student loan market, it would be beneficial for all student borrowers to make their scheduled monthly repayments, and complete their repayment schedule by the loan maturity date. However, on an individual basis, this might not be so easy.

Borrowers who are having trouble making their monthly repayments due to their financial circumstances may have the opportunity to complete a student loan refinancing, which could allow them to restructure multiple federal and private student loans into a single, more manageable arrangement with a new lender.

American students often enter into loan commitments with lenders when they are as young as 18 years old. After several years of education, it could be expected that their financial situation has improved, making them eligible for more attractive loan terms and interest rates.

In that case, student loan refinancing allows student loan borrowers to refinance their federal and private student loans once they have a stronger credit history or employment outlook.

Most students, graduates or professionals who refinance their student loans can end up with lower monthly repayments, a lower interest rate or APR, or a lower total repayment amount due to more a competitive loan product from a new lender. When refinancing, it is recommended that student loan borrowers investigate and assess all of their options, and find a loan that is right for them.

Student loan borrowers often suffer from a lack of understanding on the consequences of defaulting on their student loans. Making on-time repayments on your student loans is important and can have a significant influence on your credit record. Lenders will often reward borrowers for on-time repayments, benefiting both the borrower and the cosigner.

If your student loan repayments are causing you concern, consider learning more about the possibility of refinancing. Credible is the leading marketplace for student loans, allowing consumers to receive personalized student loan refinancing offers from multiple lenders. The simple and free process takes just minutes, and could save you thousands.