What Is a Hybrid Loan Product in Education Financing — And Is It a Rip-Off?

 December 15, 2020
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If you are debating between fixed and variable interest rates on your student loan application, you might think hybrid loan products will only complicate the choice.

Hybrid loans, however, could help you score a lower initial interest rate, reduce your monthly payments and/or potentially save you some serious cash.

Here’s what to know about these hybrid loan products and how to decide whether they’re in your best interest.

What is a hybrid loan?

Simply put, a hybrid loan carries a blend (or hybrid) of fixed and variable interest rates.

You might be drawn to fixed rates because of their consistency and security. You can be sure that your rate won’t increase during repayment, though you might have to accept a higher initial rate in exchange. This type of loan has cost assurance, letting you know full well the exact price of each monthly payment for the duration.

A variable rate, however, can fluctuate with the market. Currently, interest rates have hit historic lows, so variable-rate loans are likely to come with lower starting rates than for fixed-rate loans.

Getting a lower rate now, even though it might increase in the future, could be a good trade-off if you plan to repay your loan before the student loan interest rates have a chance to rise too much.

With hybrid loan products, a long-offered option on mortgage but a relatively new phenomenon in education financing, lenders typically offer a fixed rate for a portion of your repayment before a variable rate kicks in later. You can find hybrid loans offering lower introductory rates than ones you could secure on a traditional, fixed-rate loan.

Is a hybrid loan right for you?

A hybrid loan offers some (if not the best) of both worlds.

Like with fixed-rate loans, you secure a relatively lower rate for the beginning of your repayment — when the balance is at its largest — and keep your payment dues consistent. And like with variable-rate loans, you could also save more money if your variable rate doesn’t rise significantly during the remainder of your repayment.

So, yes, that makes a hybrid loan appealing if you want to prioritize low monthly payments over higher interest payments down the road. You might think of it as a graduated repayment plan, but for private loan borrowers. As your income (hopefully) rises, so too does your ability to make larger payments on your potentially higher rate.

Check the math …
Say you’re considering refinancing $50,000 on a 10-year term, marked with a 4.05% fixed rate for five years, followed by a variable rate that averages out to 5.75% over the final five years. Your payments for the first half-decade ($922) would be noticeably lower than for the latter ($961).

A hybrid loan could also be appealing if you plan on prepaying your loan — that is, paying it off before the variable rate strikes.

Prepaying is a realistic option for many borrowers. CommonBond, which helped pioneer hybrid loan rates for student loan refinancing in 2015, said their average customer finishes a 10-year repayment in six and a half years.

Check the math …
Say you’re considering refinancing $50,000 on a 10-year term, tagged with either a 5.05% fixed rate or a 4.50% hybrid rate. If you go the fixed route and prepay by the five-year mark, you’d shell out $6,682 in interest. But if you elect a hybrid rate and repay the loan within 60 months, you’d save almost $800, paying just $5,929 in interest.

Running the numbers with our student loan payment calculator could clarify the usefulness of hybrid loans for your own situation.

Where can you find hybrid loans?

If you seek either lower monthly payments or a faster, cheaper repayment, you might decide that a hybrid loan is right for you. The question then becomes where to find one.

Here are two reputable lenders advertising hybrid loan products.

1. CommonBond

Top-rated lender CommonBond currently offers a 10-year term for hybrid loan rates. That’s an initial five years on a fixed rate and five more on a variable rate.

Keep in mind that with CommonBond at least, you could secure a lower fixed or variable rate if you have sterling credit. The lender’s rate range for a hybrid loan started at 4.05% with autopay as of August 25, 2020, surpassing the base rates for fixed (2.98%) and variable (1.99%) loans on that same date.

Lowest APR*: 4.05%
Highest APR*: 5.75%
Variable rate cap: 9.99%
Variable rate margin: 4.12% to 5.63%
Rates reflect CommonBond’s 0.25% autopay discount and are as of Aug. 25, 2020.

But that said, a CommonBond hybrid loan could be a cost-saver if you have good but not excellent credit. The lender’s maximum initial rate for hybrid loan products topped out at 5.75% (as of Aug. 25, 2020), while fixed-rate loans carried a highest possible rate of 7.07%.

2. iHelp

iHelp is another example of a lender that features hybrid loan rates, although it offers them only on a 20-year repayment term. Your rate would be fixed for the initial five years and then get readjusted every five years until your debt has been repaid.

As of August 25, 2020, iHelp offered initial hybrid rates of 3.235% p lus the 90-day average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. For example, with the SOFR set at 0.08% (also as of Aug. 25, 2020), the lowest possible iHelp hybrid rate was 3.32%.

Like CommonBond, iHelp provides other common student loan refinancing perks, including cosigner release and no origination fees or prepayment penalties. But the lender goes above and beyond by also offering expansive deferment and forbearance options, plus a federal loan-like income-sensitive repayment plan.

What’s the worst that could happen with a hybrid loan product?

It’s never fun to imagine worst-case scenarios, but it could help you choose between fixed, variable and hybrid rates for student loan refinancing.

Say you lose your source of income and can no longer afford to prepay your hybrid loan. Or perhaps your fixed-turned-variable rate starts climbing in year 6 of your 10-year repayment and you struggle to keep pace with the larger monthly payments.

Before you select an initially lower hybrid (or variable) rate over a fixed rate, think these scenarios through. Even if the rewards of hybrid loan products outweigh the risks, you still have to be comfortable with those risks.

Also, it’s best to choose a lender for reasons beyond simply whether it offers a hybrid loan. If you are concerned that the second half of a hybrid rate could get the better of you, for example, you might prioritize lenders like iHelp that offer forbearance to pause your repayment in times of financial distress.

Note: Student Loan Hero has independently collected the above information related to CommonBond and iHelp student loan refinancing. The lenders have neither provided nor reviewed the information shared in this article. The rates quoted here were current as of Aug. 25, 2020.

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