Our latest borrower batch is live, and so is our redesigned site!

Our latest borrower batch is now live!  There’s $140,000 available to lend in this batch to great borrowers from a variety of backgrounds.  You can check them out at our completely redesigned site, with borrower endorsements and other new features that help highlight borrowers, their stories and connections.  Lending is still quick and easy, so check out the listings and make a pledge!  Help reliable people save money while making a nice return for yourself.

Have thoughts about the redesign?  We’d love to hear them!  Share your thoughts here or at redesign@wefinance.co.

Last Chance to Borrow with the October WeFinance Batch!

It’s almost time for our next batch of borrowers to go live!  The October WeFinance batch goes live October 6th.  If you’d like to save money on an existing debt with us, now’s the time to join the program!  Visit https://www.wefinance.co/borrower_interest, tell us a little about yourself and we’ll be in touch to discuss.

Our next batch of listings is live!

The next batch of listings is live!

wefinance.co/listings

Our borrowers’ combined goals this batch exceed $130,000. That’s a huge opportunity  to help some responsible people save some money while earning a 4% return for yourself. You can loan as much or as little as you like and diversify among borrowers with no extra work, since all the payments in both directions are automated. Check them all out!  And stay tuned to the blog for more progress updates as the pledges come in.

Some Things the US Total Student Loan Debt is Bigger Than

Issues of student debt move in and out of the news spotlight from time to time.  As individuals, the vast majority of us have student loans, had student loans, or know many people who do.  But one graphic from popular ‘nerd humor’ comic XKCD (described as such with love!) really puts the issue in perspective.  

At the time this chart was put out (2011), the total value of outstanding student loans in the US–over $955 billion–was bigger than:

• Total annual spending on all primary and secondary education in the US ($612B)
• The endowments of the 63 wealthiest universities in the US combined ($277.5B), by a factor of more than 3
• The combined annual profit of all the companies in the Fortune 500 ($708.6B)
• All state taxes collected nationwide ($642B) 

And many other things.  Check out the graphic for yourself!  The student loan section is in the leftmost part of the ‘billions’ box.

Of course, these figures are all changing over time, but with outstanding student debt having surpassed $1 trillion back in 2012, it’s likely many of these comparisons have only gotten worse.

Borrower Applications for Our Next Batch are Due August 8th

We’re excited to announce the deadline to apply to borrow in the next WeFinance batch is August 8th!  We’ve already talked to many great applicants, with developing careers in law, business, tech, health, public policy, education, and other fields, who are ready to stop overpaying interest on their student loans and similar debts by borrowing from real people at a 4% fixed interest rate, and there’s still time to join them.  If you’ve used our interest calculator or five-year plan calculator, you know that even refinancing a small share of your existing debt could save you thousands of dollars.

WeFinance borrowers make listings which share a little bit of information about themselves and offer terms for their desired borrowing, then choose how those listings are shared.  Many borrowers take advantage of our growing lender network of leaders in these same fields–real people who are sick of getting garbage interest rates on their savings at the bank and who are excited about empowering their future colleagues.  Other borrowers also extend the option to loan to their own friends, family, and colleagues, who enjoy the dual benefit of supporting someone they know and getting a better return on their savings.  Most borrowers do both, maximizing the amount they’re able to refinance at a lower rate.  By refinancing smaller amounts from a variety of individuals, borrowers enjoy an expanded support network, while lenders enjoy less risk.  Best of all, everything’s totally automated for both sides: once your bank account is linked, there’s nothing you have to do to get paid or repaid on your loans, whether you’re involved in one loan or one hundred.

Applying just takes a few minutes and is without commitment: we’ll follow up to let you know if you’re a good fit and answer any questions before you decide.

We’ve seen great success with our existing borrowers so far, and if you’ve got an expensive outstanding loan, we hope you’ll consider joining in on the next batch.  Be sure to check out our home page and FAQ for more information, and shoot us a note at support@wefinance.co with any questions you have.

Saving with a Shorter Loan Term: It’s Not All or Nothing

At WeFinance, we spend a lot of time thinking and talking about the huge disparity between the interest rates that those with student debt are often forced to pay on their traditional student loans and the interest rates people can routinely earn on their savings.  We think that many borrowers stand to benefit from an option that reduces their rate.  But, at the same time, we realize it’s not always simply a matter of interest rate.  There are several other factors to consider when comparing loan options, and one factor that many borrowers cite as key to their decision making is the length of time they have to repay the loan.

Depending on the repayment plan they’re under, a borrower might have between 10 and 25 years to repay their loan.  That loan will cost a fortune in interest over that length of time, but a borrower may not feel they can commit to paying everything back in a shorter time period, especially if they already feel like their monthly payments are close to the limit of what they can currently afford. So they worry that options like WeFinance–where their refinancing comes from real people in their network, who may not be able to wait as long as 10 or more years to be repaid–may not make sense for them.

The incredible thing about compound interest, though, is that even refinancing a small part of your loan at a lower rate can save you a ton of money.  And, one good thing about most traditional student loans is that there’s no penalty for repaying a larger share of the loan early.  So, even if you can only afford a few extra dollars a month now, you can save thousands in the long run with a partial refinance.  And, even if your current situation doesn’t allow any increase in monthly payments, you might be able to save money anyway and even lower your current monthly payments with a partial refinance loan with payments deferred.  (WeFinance loans, for example, can either have monthly payments or a lump-sum payment at the end, at the discretion of the borrower.)

To help illustrate this, we released a new ‘Five-Year Plan’ calculator this week.  In about 30 seconds, you can see how various partial refinance options with lower rates over five years can save you a bunch of money relative to just simply paying off your current loan over 10 years.

For example, if you owe $50,000 at 6.8%, even just refinancing $5,000 of that loan, at a cost of less than $35 a month for the next 5 years, would save you nearly $60 a month for the 5 years after that, and $1,380 overall.

 

And, with a 5-year loan with deferred payments, you could actually lower your monthly payment by nearly $60, and still save about $800 overall, by refinancing just $5,000.  (And, of course, the amount saved goes up the more you refinance.)

 

Of course, everyone’s exact financial situation is different, and thinking carefully about what payments you’ll be able to afford when is extremely important.  But even if you don’t know exactly what your financial future holds, there still might be a lot of money you can save.  Try our calculator, check against your own loan information (remember, things may be slightly different depending on the rules of your specific loans), and see what makes sense for you.

 

Understanding Changing Student Loan Laws

There’s been a lot of activity in recent months in terms of legal changes to student loan repayment in the US.  Unfortunately, these changes are complicated in their own right, are often bundled as part of larger legislation, and often attract a lot of press even if they never get passed.  We thought it’d be useful to summarize the major legislation together here so people can understand what changes might be coming down the pike.

• The Bank on Students Emergency Loan Refinancing Act: This piece of legislation sponsored by Senator Elizabeth Warren gained a lot of press in May and June.  The primary change it would have enacted was to allow students with existing federal student loans refinance those loans at the current rate for new undergraduate students (3.86%).  Unfortunately, the bill failed its cloture vote (the vote needed to overcome a filibuster, requiring the support of 60% of the senate) as most Republicans voted against it due to the tax increases required to pay for the bill.  It’s unlikely there will be more progress on the bill barring a substantial shift in the party makeup of congress. (Source: Elizabeth Warren’s Senate Homepage)
• The Presidential Memorandum on Federal Student Loan Repayments: In early June, President Obama signed a directive to the Secretary of Education to expand eligibility for the Pay As You Earn repayment program, which allows students with Federal Direct Loans to not pay more than 10% of their income to their student loan debt, and for any remaining balance to be forgiven after 20 years.  Eligibility is planned to be extended to older borrowers who were previously ineligible–those who started borrowing before 2007 or stopped borrowing before 2011.  But, there aren’t any changes for those with higher incomes, or who were already eligible for this program (apart from some vaguer educational measures that don’t affect how any of the loans fundamentally work).  (Source: whitehouse.gov)
• Changes to Public Service Loan Forgiveness and other programs with the 2015 Congressional Budget:  President Obama’s 2015 budget proposal includes many potential changes for student borrowers, but it’s unfortunately unclear exactly how to interpret all the changes, and unclear what (if any) of the proposals mentioned here actually will become law.  Major relevant changes in the proposal include:
  • Capping total Public Service Loan Forgiveness at $57,500 , though it is unclear if this would apply to current borrowers, and current borrowers may still have alternate resources even if so
  • Extending Repayment to 25 Years before forgiveness occurs for borrowers with over $57,500 in debt
  • Combining income of married couples when determining income levels for Pay As You Earn programs
  • Converting loan forgiveness into a non-taxable event

  Again, it’s hard to read too much into any specific proposals here because they aren’t law and weren’t even proposed by congress, but it’s worth keeping an eye on changes to these programs when the actual 2015 budget is ultimately passed.  (Source: educatedrisk.org)

We’ll continue to report on new proposals and laws as more information on them becomes available.  Of course, if you have private loans, these changes won’t automatically apply to you.  And, of course, we encourage you to check out WeFinance to save money on your debt now, regardless of what the government eventually decides to do!

What Your Interest Rate Costs You

Compound interest is the most powerful force in the universe.

-Albert Einstein (But actually probably not really)

My last job provided a cell phone plan for its employees, and when I left, I started paying around $70 a month for my phone (voice + text + data).  Eventually I found a new plan that met most of my needs for only $35 a month.  I was pretty excited: I knew that saving $35 a month meant about one more nice dinner a month, or a couple of extra days in a hotel on vacations over the course of a year.

If you’re thinking about a loan, though, it’s a lot harder to really conceptualize what a percent of interest or two is worth to you over the life of the loan.  One reason for this is that you may not even know today how long you’re going to be paying that interest.  Another is that over the life of the loan, you’ll have to pay interest on the interest you’ve previously accrued (the phenomenon known as Compound Interest).  So how does shaving a couple of points of interest off a loan actually translate to dollars saved?

To help shed some light on this, I used WeFinance’s new loan interest calculator to show some sample outcomes for a common student loan profile.  There are other loan calculators on the Internet, of course, but we built this to automatically compare both varying loan rates and varying repayment lengths, so borrowers can immediately see what the effect of all their options would be on one screen.

Consider $10,000 of debt in a Graduate/Professional Stafford Loan from one of the last several years, with an annual interest rate of 6.8%.  (Link to this on the calculator)

As you’d expect, your interest rate isn’t as big a deal if you’re going to pay off the loan soon.  A 6.8% loan on $10,000 for a year costs you about $150 more than a 4% loan.  But paid off over 10 years, that gap widens to more than $1,600 difference, or about $15 a month for 10 years.  And that’s just on ten grand of original debt–most grads have substantially more than that.

Shortening the duration of your loan goes a long way to saving money as well.  For example, if you can find an extra $70 a month, by refinancing a 10-year loan at 6.8% to a 5-year loan at 4%, that $70 a month payment increase will get the debt off your back 5 years sooner at a total savings of almost $2800.  (Again, all these numbers are for a loan of $10k; you can multiply or divide every dollar amount here accordingly to match a larger or smaller debt.)  Would you take a couple of nice dinners less per month in the short term to pay your debt off twice as quickly?

One additional aspect to factor in to these calculations is inflation.  For the past few years, annual inflation in the US has been hovering at around 2%, so if that trend continues, by the end of your loan the amount you’re paying won’t be worth as much anymore in terms of what you could otherwise buy with the money you’re paying.  Fortunately, the calculator also does this calculation for you, to give an approximate total cost of your loan over time in terms of today’s value of money:

So even measured in today’s dollars, getting your rate down to 4% on a 5-year term from 6.8% on a 10-year term will save you over $2,000 for every $10,000 you owe.  That’s a nice chunk of cash!

As WeFinance helps more of our borrowers refinance debt at 4% or lower, the total amount we’re helping them save will start really adding up.  We’ll hopefully have some stats to share on that front in the coming weeks.

For Throwback Thursday: 20 Years of Student Loan Rates vs. CD Rates

Why does peer-to-peer lending exist?

The core observation that drives WeFinance and every other peer-to-peer lending platform is that the savings rates offered by banks are (substantially) below the interest rates charged by those same banks to borrowers.  By making the transaction direct at a rate between these two values, both sides can, in theory, benefit.  

Of course, the calculation isn’t actually that simple.  There are risks involved in lending, you can’t use your money as freely when it’s lent to someone else, and work is involved on both sides in maintaining a loan.  If the alternative for would-be peer-to-peer lenders is less risky, then it makes sense for them to sacrifice some interest; or if there is a lot of work involved for either side, they might choose to pay a little more or earn a little less.  

So it makes sense that there is some gap between these two numbers…but how big should that gap be?  You could probably write several dissertations with theories on that topic, considering a variety of factors.  But one quick-and-dirty way to see if things might be out of whack would be to look at how these values vary over time.  If the gap now is very different than it used to be, and we don’t have a good clear justification for that, that might suggest that one or both of the rates aren’t set efficiently (though we can’t say for sure whether they were set inefficiently now, in the past, or both).

There isn’t just one ‘savings rate’ and people pay a variety of amounts on their student debt depending on a variety of factors.  But, for the sake of concreteness, I looked at the federally maintained 6-month CD rate compared to the federal unsubsidized student loan rate for the last 20 years.  (There are a variety of subsidized options that have varied over the years, but this is the unsubsidized you would pay on debt for, say, a graduate degree.)

(Sources: federalreserve.gov, New America Foundation)

So, even though student loan rates today are as high as they were in the 90s, the spread over the savings rate is more than twice what it was 20 years ago.  As the early recession of the early 2000s brought CD rates down, student loan rates came with them.  Later in the decade, both values recovered together, with the student interest rate lagging slightly.  In fact, if you were going to grad school in 2005 and could pay for it out-of-pocket, you would still have been better off taking a loan voluntarily and putting that money straight into a CD that paid more with no real risk (since you could always pay the student loan off early as soon as the CD rate came down).  The notion of taking out a loan for the heck of it has got to be hard to believe for someone who took out student loans in the last few years.

This isn’t an ironclad analysis by any stretch, of course, as many other factors could play a role in why these rates are set as they are.  In terms of costs of loan maintenance, you’d probably expect those to fall over time as more information and transactions can be done online, so that doesn’t sound like a great justification.  What about the risks involved?  If the default rates were up, it would make plenty of sense for loan interest rates to stay high even when savings rates dropped.

(Sources: federalreserve.gov, New America Foundation, Department of Education Office of Federal Student Aid)

Unfortunately, this is not an apples-to-apples comparison, as the rate spread applies to graduate loan rates in recent years, and the loan default rates are across all loans.  Furthermore, since we don’t have as much data on whether more recent loans will default than we do about older loans, the best available comparison is against the percentage of loans that defaulted within 2 years after repayment began (so the 2013 data point is the share of loans that started repayment in 2011 that had defaulted by 2013).  But, from this quick view, it certainly doesn’t look like the savings/loan rate spread nicely correlates with default rates: although default rates have risen since 2008, they’re still below what they were in the mid-90s, when the spread was at its lowest.

Why do you think this spread has been so high for so many years?

Welcome to the WeFinance blog!

Hey everyone,

Welcome to the WeFinance blog!
I started WeFinance to help reduce the inefficiencies in savings and loan markets as they exist today.  On this blog, we’ll talk about some of these inefficiencies and closely related topics–student loans, peer-to-peer lending, evolution of debt laws and customs, and so on.

Thanks for reading!

Eric