ShareThis Page
Business Headlines

Feds' role in refinancing of student debt debated

| Saturday, June 20, 2015, 9:00 p.m.

For young people with good jobs, repaying student loans has probably never been easier. In the last four years, a growing number of companies began offering to refinance people's federal loans, which generally means buying the debt and collecting payments from borrowers at a much lower interest rate than the government was charging.

The companies — which include startups and traditional banks alike — say this is an attractive business opportunity because certain graduates are bound to pay back their loans on time. Buying their debt and collecting small, but virtually guaranteed payments over time can be a profitable enterprise.

For the people whom these companies target — often graduate school alums — the deal has few drawbacks. Someone who refinances public loans through a private company like Social Finance or CommonBond pays less interest over the long haul. They give up the right to enter into government repayment plans, but it's unlikely these particular folks would need to rely on such programs, which are targeted to struggling grads.

Sounds like a win-win scenario for all players, except for two: the federal government and, by extension, the taxpayer. As Bloomberg reported recently, the boom in student debt refinancing for a few could be bad for the masses. Taking the least risky borrowers — the ones with good jobs and high incomes — out of the pool of people repaying student loans makes that pool more risky overall.

Imagine a doomsday scenario in which private lenders manage to pluck every solvent borrower out of the group of students and graduates indebted to the government. That would leave the rest of us, who finance the loan program and perhaps count on college loans for ourselves or our children, relying on a set of statistically unreliable people to replenish the government's coffers. Not fun.

Government refi?

So should the government get in on the refinancing game? Some say yes. The Education Department, says Michael Simkovic, a law professor at Seton Hall, is overcharging certain borrowers, given how unlikely they are to stop paying the debt back. He says it would make more sense to give lower interest rates to people who major in lucrative fields, or who go to graduate school for certain professional degrees.

“There are college majors that are associated with much better outcomes in the labor market,” Simkovic says.

People who get undergraduate or graduate degrees in engineering, medicine, economics, business or finance should probably get lower rates than they're getting, he says. The fixed interest rate for undergraduate federal loans disbursed between July 1, 2014, and July 1, 2015, is 4.66 percent. He wants people who go to law school or medical school to get a discount, which he would like the government to calculate based on how often certain degree holders have defaulted on their loans in the past.

Moral stickiness

Not everyone thinks this scheme makes sense, logically or morally.

“If you start saying, ‘Let's change the terms to give better loans to less risky people,' then you pretty quickly get to, ‘Let's give worse terms to riskier people,' ” says Ben Miller, an education expert at the Center for American Progress.

“You'd very quickly have to worry about redlining,” Miller says, referring to the illegal practice of making home loans prohibitively expensive or inaccessible for people of color.

“We've already made the process of paying for college extremely confusing,” Miller adds, so why add a new web of complexity to the mix?

The other concern Miller has is that giving a discount to anyone who goes to law school, for instance, assumes all law schools produce similarly successful graduates.

“There are some crappy law schools out there. At what point do you draw the line?” Miller asks.

Simkovic points to data showing that even people who go to lower-ranked law schools tend to have low default rates and will probably have a more lucrative career than someone with a degree in film, for example. He says the discounts wouldn't be unfair to certain social groups, since any informed person can decide to major in computer science.

“What you choose to study is a choice,” Simkovic says. “It's non-discriminatory and it's predictive” to lower rates based on that choice. Of course, in a country where ability to acquire knowledge is affected by parents' wealth as early as kindergarten, it isn't totally clear how much of a choice Americans have in the matter.

TribLIVE commenting policy

You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.

click me