The CommonBond Hybrid Loan is a 10-year term loan. The first 5 years have a fixed rate, and the last 5 years have a variable rate.
The CommonBond Hybrid Loan option balances the many competing tradeoffs of choosing a particular repayment term, helping to minimize: 1) interest rate, 2) size of required monthly payment, and 3) total interest paid.
The Hybrid also helps reduce the uncertainty of a variable rate loan by fixing the interest rate for the first five years of repayment, and then switching to a variable rate for the remainder of the loan period. For borrowers who tend to prepay, this period of interest rate uncertainty can be relatively short, allowing Hybrid borrowers to benefit from a fixed rate lower than our normal 10-year fixed rate loan.
How the Hybrid Loan Works
The fixed rate for the first 60 months would be at a range of 3.82% to 6.25% (with auto pay discount) based on your credit profile. This rate is lower than the rate you would get for the regular 10-year fixed rate loan, all else equal.
Your last 60 payments will be with a variable rate that equals to 1-month LIBOR + a margin based on your credit profile. The interest rate also comes with a cap to prevent against significant rate increases.
Using today’s rates, your rate range would be today's LIBOR of 1.24% plus a margin of 2.38% to 4.88% (with auto pay discount).
Why would someone want this new product over pure fixed or pure variable refinancing options?
Compare the CommonBond Hybrid Loan to our other products:
- Offers a lower fixed interest rate vs. the 10-, 15-, or 20-year fixed product
- Features a more manageable (i.e., lower) monthly loan payment vs. the 5-year loans
- Reduces total interest paid over the life of the loan vs. the 10-year, 15-year and 20-year fixed loans
- Eliminates uncertainty regarding your interest rate and payment for the first five years of repayment – when your loan balance is at its highest. No traditional variable rate student loan can say the same.
You may be thinking, “Wait a sec. If my interest rate starts off fixed, but then switches to a variable rate after five years….have I really eliminated uncertainty over interest rates?” And you would have a valid point, if 1) you plan on making little to no prepayments over the life of your loan and 2) market interest rates are much higher in five years, which could increase your loan interest rate.
However, many CommonBond borrowers like to prepay their loans to reduce their student debt load as quickly as they can. (“Prepayments” are any payments in excess of your monthly loan balance and can lead to your paying off the loan early). The time it will take the average CommonBond borrower to pay off a 10-year product will be about 6 years, according to currently observed rates of prepayment by CommonBond borrowers. That means by the time the loan rate switches from fixed to variable, your outstanding loan balance – the amount you pay interest on – is relatively small, and the time during which you are exposed to interest rate uncertainty is relatively short.