Hacking away at student loan debt

Ashley Tate | OZY

Michael and April Loeffler know all about the value of a good education. But that doesn't mean the couple are happy with the student debt they've amassed while paying for five degrees plus a professional certificate. In fact, they took out the federal maximum to help fund their tuition bills, and despite years of payments and earning a grant, they're still saddled with debt. How much, exactly? "I prefer not to think about the total amount," says Michael, an assistant principal in Tulsa, Oklahoma. "I'm admittedly in voluntary denial."

He's hardly alone. Today there's more than $1.3 trillion in outstanding student debt, and the average borrower owes $28,400 upon graduation, says the Project on Student Debt. Yet as more Americans borrow a whopping amount to pay for higher education, they're not always thinking about how they're going to pay back their hefty loan commitments. Which is where a growing group of startups are trying to squeeze in to help grads repay and manage their loans.

Most of these ventures focus on refinancing and consolidating loans. CommonBond, for one, lets qualified borrowers — smarty-pants with certain graduate degrees in areas like finance, law and nursing, among others — refinance up to $220,000. Another called SoFi provides already-employed grads (congrats!) or those with existing job offers from more than 2,200 institutions with the ability to refinance any amount of federal or private loan. The San Francisco-based company first crunches info like how much dough a borrower is currently making and where he or she previously worked or studied, then spits out both fixed and variable interest rate offers instead of just the federal government's one-size-fits-all rate, which now sits at 4.66 percent for undergrads.

Tuition.io, meanwhile, is kind of like Mint, the personal-finance management site, but for student borrowers. It aggregates a person's loans from various places into one spot (it has organized almost $2 billion in student debt so far) and provides a snapshot of how much someone owes. Sounds simple enough, yet borrowers from more than 3,000 schools are using it to keep organized.

Of course, each site acts like it's best in class. Tuition.io claims its platform has cut delinquent loans of users by 20 percent, while SoFi boasts that its members have saved an average of $11,783. Not to be outdone, CommonBond pitches itself as a BOGO — buy one, give one — company, like a TOMS Shoes or Warby Parker of student loans; for each loan issued, it covers a year's worth of schooling for a child in need.

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Many investors, meanwhile, seem to view these startups as the future of paying for higher education. SoFi received $80 million in funding from a group that included Peter Thiel, PayPal's co-founder, while CommonBond recently announced that Nelnet, one of the country's largest servicers of student loans, made an equity investment and will be financing a portion of the company's loans. In 2013, investors including former Citigroup CEO Vikram S. Pandit infused CommonBond with more than $100 million.

But not everyone is enthusiastic about these companies. Mark Kantrowitz, senior vice president of Edvisors.com, a college-financing education site, says services like SoFi and CommonBond are actually just offering a new type of loan, and there's no guarantee that the few who qualify will actually save money by landing a lower interest rate. Even if you do, some note, the amount saved will be nominal. (The companies say that borrowers with strong credit often receive better terms than their original federal or private loans.)

Some also warn that these companies aren't always reducing the overall amount of student debt and that they don't actually reduce a borrower's principal. In fact, it's that principal — not the interest charges — that constrains a person's ability to accumulate assets. Case in point: Analysis by Pew Research reveals that graduates who attended college without borrowing money have seven times the net worth of someone with student debt ($64,700 versus $8,700).

In some instances, loan consolidation might be the only thing that a borrower gets offered. (That's where several loans are essentially rolled into one — meaning you have to make only one monthly payment instead of several.) It's a scenario that Michael has experienced when he has tried to refinance his family's loans, which he expects to keep paying off for at least six more years. "Many months have certainly demanded strategic timing, other-spending freezes and no small amount of praying and breath holding," says Michael.

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