Student loan lenders aggressively courted Ivy League borrowers -- but now it's backfiring

Borrowers with good credit and income levels are highly courted in the student loan world. So it’s no surprise that online lenders target Ivy League students.

But Ivy League grads are proving more shrewd at managing their debt than anticipated, preventing borrowers from collecting high interest, the Wall Street Journal reported.

These grads not only pay off their debt quickly, they aggressively refinance when they can get lower interest rates.

Online lenders initially targeted Ivy League borrowers for their qualities: good credit, relatively high income levels, and high levels of education. And to entice the students, online lenders offered lower and lower interest rates. Paradoxically, these are the exact traits now hurting the companies.

After graduation students are eager to refinance, further incentivized by online lenders’ lack of fees to do so — unlike the federal government or major lenders.

On top of this, students are paying off their loans in advance, as much as three times faster than in the original terms of their loan, according to The Journal.

“It surprised me,” Gary Lieberman, chairman of Darien Rowayton Bank, told the Journal. “The nature of these borrowers is that they really want to pay off their debt.”

Student loan debt in the US has reached a staggering $1.3 trillion, and many refer to the seemingly inexorable levels of mounting debt as a mounting crisis. Student loan debt doesn’t target all borrowers equally, however.

“Half of borrowers exiting school in 2011 attended a for-profit school or a 2-year college,” a Brookings paper noted. “These borrowers represented 70% of defaults.”

These defaults hurt lenders, delaying the recovery on their loan investments. But as it turns out, paying off loans too quickly can be damaging as well.

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