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Aaron Pisacane 04 Oct 2022 5 min read

Student Loan Refi is Dead --Growth Pivot

By 2023, student loan refinance as a product that has served a real market need will be dead. After a 10-year growth cycle that started in 2012, Fed Fund rate increases during 2022 that has been at the fastest pace in 40 years is the reason. The Federal Reserve is hyper-focused on bringing down inflation as measured in the Consumer Price Index (CPI), which has had consistent prints over 8%. 

I have been an active participant in student loan refinance from 2012 to 2017 at Laurel Road, and advisory roles thereafter.  Clearly,  the end is nearing as rates continue to rise at their fastest pace in 40 years.    The market expects another 1.25% of Federal Reserve rate increases by year-end.  

Graduate PLUS Rates Range 6.28% to 7.54% (last 4 years)

First, we know that monthly private student loan refi volume ("Refi") is down 50% at the largest lenders that report quarterly in their public earnings release.  The culprit has been the on-going federal student loan payment pause that continues until December 31, 2022.  Some believe that the pent-up demand will be released in 2023 when payments resume.  That reasoning misses the big picture:  continued rising interest rates. 

Second, the 6.28% to 7.54% Graduate PLUS loans rates over the last 4 years will exceed average Refi rates by year-end.  Once this loan type is out of play for refinancing, the market will shrink to undergraduate private student loans that have average interest rate of 8-9% from the commercial lenders.  This industry scaled by refinancing 60-75% of their volume from Grad PLUS. 

The average student loan refinance rate ranges 6-7% depending on the lender.  By this December, average rates will be above 7% in response to rising rates by the Federal Reserve.  Currently, a 30-year mortgage is nearly 7%, which is secured by real-estate.  The unthinkable is now playing out. 

I expect the Refi market will come back with the next down cycle of interest rates.    Another 2-3 years may pass before the next interest rate down cycle begins. 

In the meantime, as reported by Epic Research on September 10th, lender marketing, as measured by direct mail in 2022, is approaching 2016 levels.  Consumer demand, as measured by online search volume for "Student Loan Refinance", continues to be suppressed by the federal payment pause. 

Lenders should start to downsize Refi operations and lower marketing spend to match the shrinking addressable market for Refi.  There is historical precedent in the mortgage refinance industry.  However, this will be a first for the Refi industry since its start in 2012.   

Lender Pivot:  New Product Development

Lenders can focus more on the private student loan market, lending to traditional college students with parent cosigners. I don't recommend this approach.  My reasoning is that you are in an increasingly crowded field in a time when enrollment trends are decreasing.  Headwinds include demographic trends of declining high school graduates and the increasing negative perception of the positive 'return on investment' of a college degree.  

Strategically, lenders need to focus on growth areas using 'pilots' to control risk.

(1) Lending to low-risk college students that are not able to secure an eligible cosigner.   

You know that you are already declining 40% of applicants using a traditional credit model that only a working adult with good credit can pass.  Not all hardworking students are fortunate to have an eligible cosigner.  We must work harder to understand the student's risk profile with more data.  

(2) Short-term credential programs. 

(3) Adult learners looking to re-enter college to complete a degree. 

All three areas require an updated credit model to fill in the blind spots of traditional student loan underwriting models. 

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The Einstein Risk Score (click here to learn more) uses predictive data to compile a student risk score so that lenders can  make informed lending decisions at scale.  The Einstein Risk Score leverages college transcript, student loan indebtedness and future income to rank order an applicant's risk level.   This is accomplished through a modern technology platform that produces a score in under 2 seconds. 

Pilot the Einstein Risk Score to grow in years to come.   

You cannot change market trends, but you can react to market opportunities.