The State of Private Student Loans
- July 17, 2017
- Posted by: Mike Brown
- Category: Student Loans
It is no secret that the student loan debt crisis facing the United States is an issue of extreme consequence, and an issue that seemingly continues to get worse.
According to LendEDU, the national student loan debt in the U.S. currently stands at a whopping $1.41 trillion. There are more than 43.3 million student loan borrowers in this country, with recent graduates owing an average of $28,400. The number of Americans holding student loan debt is higher than the population of over 200 countries and 60 percent of graduates leave campus with some amount of student debt.
On top of this, the current federal student loan default rate is at 11.8 percent. Student loan debt is the second highest form of debt in the U.S., second only to mortgages (which caused the Great Recession). In addition, roughly 63 percent of student loan borrowers have delayed buying a home because of their education debt.
The majority of borrowers use federal student loans and over 90 percent of outstanding student loan debt is provided by the Department of Education's federal loan programs. However, each year over 1.4 million students use private student loan debt to fill the financial gap between cost of attendance and financial aid and savings.
As the cost of higher education continues to balloon in the U.S., the private student loan industry is growing in originations and in size. There are currently over 100 private student loan lenders!
Furthermore, the total amount of outstanding private student loan debt in the U.S. is over $165 billion.
LendEDU, a marketplace for private student loans, created The State of Private Student Loans Report to give readers an exclusive look into the processes, outcomes, and changes in the private student loan market.
In our report below, you will find original and exclusive data collected from 80,000 private student loan applicants that have gone through LendEDU since the start of 2016.
Insights from LendEDU's Private Student Loan Database
According to LendEDU's private student loan database, 94 percent of private student loan applicants chose a variable interest rate. Only 6 percent of private student loans had a fixed interest rate.
This means that many private student loan borrowers are taking a considerable risk. Fixed interest rates are locked in for the life of the loan while variable rates change over time with a benchmark rate. Especially given the current economic climate, where federal interest rates have already been increased by the Federal Reserve, you would think that new borrowers would prefer interest rate stability during repayment.
Moreover, as the Federal Reserve raises interest rates, the private student loan market is quick to adjust. In 2017, many private student loan lenders like Sallie Mae, PNC Bank, and College Ave Student Loans have all raised their interest rates on undergraduate student loans. Many private student loan borrowers have taken a significant risk by selecting variable interest while the Federal Reserve has very publicly signaled that higher interest rates are on the way. Although unlikely, the gamble may pay off, but we were surprised to see such polarizing results.
LendEDU found that the average term length on a new private student loans is 9.5 years. Additionally, the average overall interest rate of a funded private student loan was 7.99 percent. But, the interest rate statistics get more interesting when they are broken down further.
The average interest rate of a funded private student loan that was taken out with a cosigner was 7.76 percent. In comparison, the average interest rate of a funded private student loan without a cosigner was 9.25 percent. Having a cosigner on a private student loan mitigates the risk for the lender, so these numbers make sense. They also show how costly it can be for a student debtor who does not have access to a creditworthy cosigner.
Finally, the average fixed rate on a private student loan was 9.66 percent, while the average variable rate on a private student loan was 7.81 percent. In effect, the average borrower is originally saving 1.85 percent by taking a variable rate. However, over the next 9.5 years (the average term length), many economists are predicting interest rates to rise well beyond 1.85 percent. And in general, we found that interest rates on new loans increased by 0.67% from 2016 to 2017.
Interactive Chart Featuring Interest Rate Statistics
There were a couple of more statistics LendEDU wanted to share from our application database. The average requested amount on private student loans (both declined and approved) was $12,801. The average funded amount on private student loans ended up being $12,079.
In terms of repayment options available to student debtors, 43.74 percent of private student loan borrowers selected full deferment until after graduation. 33.42 percent chose a flat payment plan in school, which entails making flat payments each month. 22.83 percent of student debtors were paying interest only while taking classes.
LendEDU's Cosigner Statistics
LendEDU's application database revealed that it was much more likely for a private student loan borrower to get approved for a loan if they had a cosigner. Cosigners are often parents, but can also be grandparents, close friends, or other relatives. A cosigner is necessary when the borrower does not have a reliable source of income, lacks a healthy credit score (or credit history at all), or simply appears to be a risk in the eyes of the lender. Cosigners act as a partner on the private student loan, making monthly payments and keeping track of the status of the loan.
According to our information, 39.37 percent of private student loan applicants applied for a loan with a cosigner. Meanwhile, 60.63 percent of applicants applied for a private student loan without a cosigner.
28.75 percent of private student loan applicants were approved when they had cosigners on their applications. Only a mere 4.90 percent of private student loan applicants were approved for a private student loan when they lacked cosigners.
These numbers come as no surprise. Applying with a cosigner greatly enhances your chances of getting funded for a private student loan. Just ask Lyn Alden, a student loan borrower who is about to finish repayment. Although she had a bevy of federal student loans, Lyn still needed private funding, and her father acting as the cosigner helped her get approved. Lyn said, "My father co-signed the loan, and we were easily approved. His credit score was near the maximum at well over 800, although his income was only about $40,000 per year."
Your chances for approval are quite minimal if you apply for a private student loan without a cosigner. Lenders simply do not feel as comfortable funding a private student loan without the added assurance of a cosigner. Overall, student loan borrowers have a less than half chance of getting approved for a private student loan, but having a cosigner does help in a monumental way.
Jeannie Tarkenton, Founder and CEO at Funding University, a private student loan lender who specializes in non-cosigned loans, had the following to say in regards to qualifying for a student loan without a cosigner, "The vast majority of undergraduate students do not have deep credit history or meaningful FICO scores - and banks are unable or unwilling to use behavioral data that are predictive of loan payment success of college graduates; so, in post 2007 environment banks simply will not extend credit to students. A student's ability to finance all of college is effectively available only to those who have willing parents with strong credit."
Interactive Map Featuring Cosigner Statistics
LendEDU's Qualification Statistics
Our applicant database provided a couple of qualification statistics that showed many prospective student loan borrowers failed to meet the standards set by the lender. The first one we will examine is the difference between the average FICO credit score of an applicant and the average FICO credit score of an approved applicant. Student loan lenders take a hard look at an applicant's credit score because that three-digit number is perhaps the best demonstration of an applicant's ability to repay a loan. A strong credit score indicates a proven record of repayment, while a weak credit score reveals a risky investment for the lender.
According to LendEDU's database, the average FICO credit score of a student loan applicant was 647. The credit score that was recorded was the highest score between the borrower and, if there was one, the co-applicant. A FICO credit score of 647 is classified as a "fair" score, the second lowest classification, according to Experian.
In comparison, the average FICO credit score of an approved borrower was 739, much higher than the average score for an applicant. A score of 739 falls into the "good" range, the third highest of five different levels. Similar to the average applicant's credit score, this average was derived by taking the highest score between the borrower and the co-applicant.
Interactive Map Featuring Credit Score Statistics
The second qualification statistic derived from LendEDU's database pertained to how income plays a part in getting approved for a student loan. It seems obvious, but lenders prefer taking on a student loan borrower, or a cosigner, with a higher income so that the debtor has the resources to repay the loan. Just as it was done with credit scores, the income statistics are calculated using the greatest income between the borrower, and if there was one, the cosigner.
According to LendEDU, the average income of student loan applicant was $46,343. This number pales in comparison to the average income of an approved student loan borrower. The average approved applicant had an income of $77,112, more than $30,000 more than the average applicant.
Based on these two student loan qualification statistics, many prospective student loan borrowers fall way below the standards set by the student loan lenders. Not surprisingly, lenders want borrowers with proven histories of repayment and comfortable incomes. The great discrepancy between what applicants have and what lenders want only reinforces the fact that having a cosigner greatly improves a prospective borrower's chances of getting approved for a student loan. A cosigner will likely have a stronger credit history and a higher income and will make your application much more appealing to the lender.
Interactive Map Featuring Income Statistics
All data used in this report was compiled from 80,000 LendEDU users who inquired about private student loans since 2016 and into 2017. Data was been provided by Sallie Mae, College Ave Student Loans, Ascent Student Loans, PNC Bank, Citizens Bank, and LendKey.
The application data was pooled from the six aforementioned companies and weighted based on the proportion of applicants. All of the applicants were sent to the six lending companies from the LendEDU.com website.
Each lender provides slightly different reporting and data. Therefore, some lenders did not provide certain data fields. Due to privacy concerns, we are unable to provide applicant weighting or confirm lender specific data.