Miwa Gardner-Page came out of Wharton with an MBA and six-figure student debt. No news there – at the top business schools, graduates exit with average student debt generally exceeding $75,000, and in some cases well over $100,000.
But the burden need not be that high, Gardner-Page says.
Consider this hypothetical pair of would-be students: Jim has a BA in early neolithic philosophy and he’s been accepted into a master’s program in interpretive puppetry. One of his ancient Reeboks has a sole flapping loose, and on the backs of his hands clumps of pocket link adhere to something sticky. Jane has an economics degree, and an acceptance letter from an elite MBA program. She’s wearing well-polished pumps and carries a slim briefcase in one manicured hand.
Which one gets the better student loan interest rate?
Neither. Both get federal loans costing about 7% annually.
UNCLE SAM SAYS: MBAS AREN’T SO SPECIAL
That’s because the federal lending programs don’t distinguish between Pocket Lint Guy, who will finish the puppetry program sunk in debt with no job prospects beyond the local coffee shop, and Ms. Slim Briefcase, who will finish her MBA and take her pick of highly paid consulting positions. Both are treated equally, even though he is far more likely to default on his student debt than she is.
That reality has created an industry around refinancing of student loans. Gardner-Page, after graduating from Wharton, did what many a smart MBA does: she refinanced, first with SoFi, then with CommonBond, and finally with DRB Education Finance. She says she cut her interest by two percentage points when she made the final switch to DRB, saving tens of thousands of dollars. Then she went from being a client to an employee of the company, now working in strategic partnerships, business development, and marketing.
All three of these companies have built their businesses on the disconnect between the one-size-fits-all approach of federal student lending, and the fact that some graduates are going to have a much easier time paying off their loans than others.
DRB COMPETES AGAINST STANFORD- AND WHARTON-BORN FIRMS
CommonBond, which launched at Wharton in 2012, advertises a lowest rate of 1.93%. Investors supply CommonBond’s loan money, and a bank underwrites the loans. The firm limits its refinancing offers to graduates of specific schools, who have earned master’s degrees in such fields as business, engineering, and accounting, as well as law, medical, and dental degrees – people with job and salary prospects that make defaulting unlikely.
SoFi, which came out of the Stanford Graduate School of Business in 2011, touts a best rate of 1.9%. The company, whose loans are investor-funded, also limits refinancing offers to graduates of select universities and programs, and requires that clients either be employed or have a job starting within 90 days.
DRB also advertises a 1.9% lowest rate. Like SoFi and CommonBond, the company offers refinancing to select graduates – of MBA, law, dental, engineering, and computer science programs – and to working professionals with master’s degrees or PhDs from accredited schools, along with qualified working professionals with bachelor’s degrees.
Those companies’ lowest figures are for variable-rate loans. Fixed-rate loans cost more, with the rate rising along with the length of repayment term: 3.5% to 6.25% at DRB; 3.5% to 7.24% at SoFi; 3.74% to 6.49% at CommonBond.
Gardner-Page, naturally, highlights the slight interest-rate edge DRB has over its peer-to-peer-lending competitors who must spend money on fundraising, she says.
“We’re attached to a bank,” she says. “That’s why we’re able to offer lower fees. On average, DRB’s borrowers received a 0.79% lower rate than our nearest competitor’s borrowers.”
SHORT TIME PERIOD, BIG REFI NUMBER
The company reports that its capacity to fund loans through deposits keeps capital costs below one per cent.
At DRB, about 20% of its 6,000 student loan refinancing clients are MBAs. Since the bank entered the student loan business less than two years ago, it’s some $600 million in student loans, Gardner-Page says.
Refinancing federal student loans, however, can carry some risk. In some cases, the debtor loses federal protections such as debt-cancellation upon death, meaning the borrower’s estate could take a hit. However, DRB cancels the debt in event of debt, Gardner-Page says. As with any loan, job loss can effect ability to make payments. SoFi offers “unemployment protection” that suspends payments for three-month increments, up to a total of 12 months for the life of the loan, in cases where the client has lost their job through no fault of their own. CommonBond may grant such forbearance on grounds of economic hardship, and DRB may grant forbearance in cases of job loss.