Trouble With Student Loans? This Overlooked Factor Might Be the Reason

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How good of a driver are you? If you had to rate yourself below average, average, or above average on your people skills, what rating would you give? How honest would you say you are compared to most people?

These are questions that Tali Sharot, associate professor of cognitive neuroscience at University College London, posed to her audience in a TED talk about a phenomenon called “optimism bias.” In Sharot’s words, optimism bias is, “our tendency to overestimate our likelihood of experiencing good events in our lives and underestimate our likelihood of experiencing bad events.”

She says a firefighter in California once told her that fatality investigations done by the fire department “often include ‘We didn’t think the fire was going to do that,’ even when all of the available information was there to make safe decisions.”

In other words, “we’re more optimistic than realistic, but we are oblivious to the fact,” Sharot says.

So what does this have to do with student loan payoff? A lot, it turns out. Read on to learn more about optimism bias and what you need to do to prevent it from derailing your strategic financial plans.

How optimism bias affects your finances

First of all, it’s important to note that you can have an optimism bias even if you don’t feel like you’re a particularly optimistic person. You might simply have this bias if you tend to view the future as something that will have a better outcome than your past or present.

As a whole, there’s nothing inherently wrong with optimism or optimism bias. Without this bias, Sharot, who also wrote a book on this topic, says “we would all be slightly depressed.” But feeling as though we can always beat the average, or even that we’re invincible, can have serious consequences.

 

When I asked Sharot what she thought the most dangerous thing about this bias might be in relation to finances, she mentioned retirement savings, or the lack thereof. If we feel confident that we’ll be able to save more later, it might be easier to put it off today.

Sharot says this bias can lead us to think that projects will cost less and take less time — something that can blow the budget of wedding planners and house renovators. And, in general, we might spend more than we can afford because we imagine a big bonus or promotion that will help us pay it down later.

All in all, Sharot cautions, this bias can lead to poor planning. And in the case of student loan debt, it could lead to borrowing more than we should, due to the belief that we’ll easily earn enough later to pay it all back.

As for people already in student loan repayment, it’s possible that this bias can prevent them from strategically approaching their payoff. For example, they might stick to payment plans that barely keep their loans above water — the idea being that even if they can afford to pay more now, there’s no need because they can always pay more later.

But even borrowers who don’t feel optimistic about their debt might exhibit similar procrastination. Author and psychotherapist Will Meyerhofer has many clients facing large amounts of student loan debt. And he noticed that they sometimes feel it’s “pointless to try to pay them down” and “better to live for today.”

In other words, some might be YOLO-ing their student loan debt payoff, which can have dangerous effects on their finances. Here’s what can be done about it, whether it’s born of optimism or pessimism.

How to prevent bias from derailing your student loan payoff

So what’s the secret to preventing optimism bias (or any bias) from getting in the way of our goals? According to Sharot, it all comes down to awareness.

“Being aware of it means we can change our decisions. It doesn’t mean we have to change our bias.”

In fact, she says, it might be impossible to change our bias. So rather than worrying about transforming a core aspect of who we are, we can simply understand it and then use it to our advantage when we can, and work around it when we need to.

And for those in student loan debt who have optimism bias, Sharot says “it’s best to take a safer route,” even if your bias leads you to believe you don’t need to.

That might mean paying extra on your student loans when you can. Or it might simply mean staying on top of your payments even if it doesn’t seem important or seems like something you can handle later.

For his part, Meyerhofer takes a pretty extreme view: He thinks of student loans as cancer. “If I ever stopped the ‘treatment’ (paying off as much money as I possibly could), the tumor would start to grow again,” Meyerhofer says.

He calls this approach dramatic, but one that helps his clients see the danger of ignoring student loan debt.

Whichever way you look at it, viewing the future as the best time to handle something as important as student loan debt can be dangerous. Defaulting on your student loans — if it comes to that — can damage your credit for up to seven years. Plus, the fees and interest that add up while in default can drastically increase the cost of your debt.

And if you’re coasting on payments but could do more, you may end up paying more than you have to over the long run. On the other hand, making lump sum extra payments on your student loans once a year with your tax refund or holiday bonus can make a huge difference.

Awareness and planning for the win

As unchangeable as things like our biases can sometimes seem, the fact that awareness can make such a big difference is great news for those who have an optimism bias. And those of us might be a lot — Sharot says in her TED Talk that 80 percent of people have this bias.

Tie your awareness into planning for a future that might look like today — even if you’re hopeful that it will be much better — so you can create a strong financial plan. If you do hit a financial bump in the road, this planning could help you be better prepared (such as by having an emergency fund on hand).

And if things only get better, then you’ve lost nothing from the careful planning — only gained habits that will help you for a lifetime.

Interested in refinancing student loans?

Here are the top 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.89% – 6.66%1Undergrad
& Graduate

Visit Splash

1.89% – 5.90%2Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.09%3Undergrad
& Graduate

Visit SoFi

1.99% – 5.34%4Undergrad
& Graduate

Visit Earnest

1.97% – 8.54%5Undergrad
& Graduate

Visit Lendkey

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

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1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of December 1, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


5 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 11/13/2020 student loan refinancing rates range from 1.97% to 8.54% Variable APR with AutoPay and 2.95% to 8.77% Fixed APR with AutoPay.