Unless your name is Sallie Mae or Freddie Mac, you know that (student) loans are no fun. Of course, neither are economic crashes . . . But, it may be that our most recent recession has made it more favorable for you (the new law school graduate), to pay off your student loans, and to pay them off more quickly. Derek Kaknes, the co-founder and CEO of Prime Student Loan, explains below. Kaknes’ Prime Student Loan helps graduates with established incomes refinance their existing student loan debt into lower rates and monthly payments. You can learn more about PSL and its view on the student loan market at www.primestudentloan.com.
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Charles Dickens began his famous novel, ‘A Tale of Two Cities’, as follows: ‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity.’ Dickens was, of course, referring to the contrasting developments in London and Paris at the turn of the 19th century — a time of both exuberant optimism and explosive turmoil. One could very easily extend this description to the world of student loans at the onset of the financial crisis of late 2008. The financial crisis affected broad swaths of our economy; but, it had a particularly acute effect on financial services. Many industries, including the mortgage, credit card and student loan industries, changed overnight; and, though many have recovered, it would be a mistake to extrapolate pre-crisis assumptions into a post-crisis world. In this post, we will examine one such assumption, that is being inappropriately relied upon in the student loan market.
The student loan market, and the broader consumer credit markets in general, changed historically on September 15, 2008 — the day Lehman Brothers filed for bankruptcy. Investors across the globe awoke to the realization that their investments held tremendously more risk than they had ever previously anticipated. As a result, lenders began to restrict credit and to increase interest rates, in order to more accurately capture the default risk in their portfolios. In the private student loan market, this had a particularly dramatic effect: the average interest rate on a student loan jumped from 5.5% in June 2008, to 12.5% by December 2008. For a student, that meant that the spread on their second semester loan had widened by 700 bps from the loan they used to fund their first semester. As the linked chart demonstrates, interest rates have receded mildly from their 2009 highs; but, that stabilization still yields an elevated interest rate, of 9.5%: