Student loan companies promise big savings. Proceed with caution.
Anthony Noto, CEO of SoFi
Adam Jeffery | CNBC
Student loan refinancing companies say they offer borrowers a way to save thousands of dollars on their debt by allowing them to pay off their loans at a lower interest rate in less time.
The reality can be very different.
Recently, the government discovered that online lender SoFi was misleading consumers about how much they would save if they refinanced their student debt with them.
The company’s ads showed average discounts of more than $ 22,000, but in its calculations, the company excluded some borrowers for whom refinancing resulted in a more expensive loan, the government found. In a colony with the Federal Trade Commission, SoFi agreed to put an end to its misrepresentation.
SoFi spokesperson Brielle Villablanca said the company has always been committed to providing current and potential members with clear and comprehensive information, in a statement to CNBC.
Federal Trade Commission found SoFi’s ads to be misleading
SoFi isn’t the only student loan refinancing company the government is watching, according to records obtained by CNBC in a Freedom of Information Act request.
The Federal Trade Commission recently sent “last warning“letters to other companies that offer big savings to student borrowers, CNBC learned. These lenders are CommonBond, Credible, LendKey and Splash Financial.
“We strongly recommend that you review your own company’s advertising statements to ensure that you are not making false or unsubstantiated statements,” the FTC wrote to these companies in October.
The average graduate leaves school with $ 30,000 in debt, up from $ 10,000 in the early 1990s. The country’s outstanding student loan balance is expected to reach $ 2 trillion by 2022.
Mark Kantrowitz, student loan expert
Source: Mark Kantrowitz
CommonBond previously reported an average savings of $ 24,000 on a page on its website, but that figure was removed after a CNBC reporter asked the company’s CEO David Klein how the lender got there.
“You’ve caught a bug,” Klein said. “We don’t share information about average savings. We think every borrower is different.”
Credible, a market for lenders, also removed its advertised average savings rate, which was over $ 18,000, the same day a CNBC reporter inquired about it.
Stephen Dash, CEO of Credible, said the company has decided to keep its ads more general following the FTC rule. “It’s not a one-size-fits-all solution,” Dash said.
LendKey’s commercials also made some dramatic statements. In one of them, the company said people could reduce their monthly payments by up to 40%.
An online ad for LendKey, which the company says it wants to remove.
Lewis Goldman, chief marketing officer at LendKey, said they were working to remove these old ads from the internet. “We no longer pretend to absolute savings,” Goldman said.
Splash Financial CEO Steven Muszynski said his announced savings rate of $ 29,340 is “very sporadically used”.
“We are also clear, wherever it is used, that this example of savings does not show average customer savings, but rather is a hypothetical example,” said Muszynski. (He assumes that a borrower’s interest rate is almost halved).
“All of them are quite aggressive in their marketing,” said Mark Kantrowitz, the publisher of SavingForCollege.com.
The main takeaway, he said, was that “you must be skeptical of the average savings figures”.
Before refinancing your student debt, use a loan calculator (Kantrowitz has a on its website) to compare the monthly payments and the total bill of your current loan with a potentially new loan.
“Keep in mind,” Kantrowitz added, “a longer repayment term results in lower monthly payments, but also an increase in interest paid over the life of the loan.”
Peter Topp Enge Jonasen | Getty Images
Once a person refinances their federal student loans, they give up certain options.
For example, the United States Department of Education allows some borrowers to make reduced monthly payments if their income is low and others can defer their bills with no accrued interest if they prove economic difficulties. The government also offers loan forgiveness programs for teachers and officials.
Private lenders usually only allow limited pauses in your payments, during which interest increases.
Therefore, Betsy Mayotte, the president of the Institute of Student Loan Advisors, said she can count on the number of borrowers for whom she thinks refinancing their federal loans to private loans is a good idea.
“Refinancing private student loans can generate a lower interest rate than federal student loans,” Mayotte said, “but your rate doesn’t matter if you lose your job, have sudden medical bills, can’t afford your payments and find it in default is your only option. “
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