Feds' role in refinancing of student debt debated
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.
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.
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.