Student Debt Crisis: Why Ivy League Students Are Bad News For Online Lenders

Ivy League graduates are looking less and less desirable, at least for online lenders in the business of student debt.

Graduates of the likes of Yale, Harvard and Princeton are unusually proactive in prepaying student loans, sometimes three times faster than expected, industry sources told the Wall Street Journal. They are financially savvy in other ways too, making moves like refinancing their loans at lower interest rates.

For online lenders, targeting students attending elite schools is a strategy based on the expectation those graduates will have better credit scores and higher incomes that render their debt more attractive to investors who buy loans in bulk. For the lender Social Finance Inc., for instance, 65 percent of the loans it securitized in 2013 came from attendees of 10 elite schools, the Journal reported.

But for online lenders, the financial acuity of these elite grads also means those loans are not paying the expected proverbial dividends.

When student borrowers pay back their loans at faster-than-expected rates, investors receive less in interest payments than planned. In some cases, bond prices have fallen as a result; some of Social Finance’s bonds have dropped by as much as 2 percent, for instance, after borrowers prepaid at a rate of 30 percent more than obligated, compared with the 10 percent that SoFi expected.

“The nature of these borrowers is that they really want to pay off their debt,” Gary Lieberman, chairman of the community bank Darien Rowayton Bank in Darien, Connecticut, told the Journal. At that bank, student debt borrowers were paying back their loans by 15 to 17 percent more than required.

Amid the continuing student debt crisis in the U.S., larger questions remain: Is this tendency an anomaly, representative of merely a tiny portion of the population? Or might it offer a glimmer of hope by portending deeper shifts?

The White House released data in April showing that although default rates remain high, they had fallen 2.9 percentage points, to 11.8 percent, among those who began repaying loans in 2012. Delinquency rates had also fallen by 2.5 percent in December 2015, compared with the previous year.

Still, the facts remain that the U.S. has $1 trillion in outstanding student loans. Today, the average new graduate owes $37,000 upon receiving his or her diploma, up from $35,000 in 2015.