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The trouble with refinancing a student loan
So why can't students cash in on these crazy low interest rates, anyway?
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It doesn’t seem fair, right? The U.S. Treasury gets to borrow money at about 2 percent interest these days. That’s latest yield on the 10-year Treasury note. When the government turns around and loans that money to college students, most of them are paying well over 6 percent interest. Meanwhile, the average fixed rate on a 30-year mortgage these days is just over 3.5 percent.
To understand why student borrowers pay so much more, I started with my go-to guy for all things financial aid, Mark Kantrowitz of FinAid.org. He says there are two big reasons federal student loans cost more than, say, a mortgage or car loan. Nobody checks your credit. And there’s no collateral.
“If you default on a federal education loan, they can’t repossess your education,” he says.
Other kinds of unsecured debt -- like credit cards -- usually cost much more, he says. “For someone with a typical credit pattern of a college graduate, we’re talking a 10, 11 percentage interest rate -- maybe even as high as 14 percent.”
Even at comparatively low rates, more people are defaulting on their education loans. And unlike other types of debt, you can’t escape student loans by filing for bankruptcy.
One youth advocacy group is pitching an idea to make it easier to pay them off -- a federal loan refinancing program.
“If you refinance loans down to 5 percent -- so just the loans that are above that -- that would save people about $14 billion in interest rate payments for this year alone,” says Tobin Van Ostern, deputy director of Campus Progress. It's part of the liberal Center for American Progress.
“It would be huge,” says Jennifer Belmont Jennings, an attorney in St. Louis. “For us, personally, it would just add a significant level of security to us.”
Belmont Jennings finished law school just as high-paying legal jobs seemed to evaporate. She owes about $170,000 in student loans, and says she could really use a few hundred extra dollars a month.
“Just from a spending standpoint of being able to do things, you know,” she says. “We bought a house several years later than we would have had we had that extra money.”
When they did buy a house, this year, they got a mortgage rate of 3.7 percent.
It is possible to refinance student loans -- privately. SoFi makes loans to students and graduates of certain colleges. The loans are funded by alumni of those schools. For a re-fi CEO Mike Cagney says the average borrower comes in with a rate of about 7.2 percent.
“We’re refinancing them into rates between 6 and 6.5,” he says. “And the borrower’s savings have been about $10,000 over the life of the loan.”
But to qualify you have to have gone to one of the 79 schools SoFi works with, like Carnegie Mellon or the University of Michigan. To refinance on a large scale, Cagney says, the federal government would need to step in.
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This story has one HUGE FALSEHOOD. BY LAW, your federal student loan aid from the govt. can't have an interest rate larger than 7%, and the rate goes up and down with the Federal Reserve rate. When you consolidate your loans with the feds, you get a set rate for life that no longer goes up or down-- mine is 3.5%. The only way the rate is ever higher than 7% is from a private loan lender, NOT THE GOVT. You staff needs to correct this falsehood right away.
@DebfromTenn - We had a civilized society, and many would argue actually more civilized than today, when there wasn't an income tax for most people.
People wouldn't need today mortgage their futures to get an education if it weren't for all this cheap credit for college because prices would be lower. When I went to university I was able to make enough money working in the summer to pay for my tuition the rest of the year. And it was for essentially the same education, some would argue more rigorous, than kids get today at these inflated prices.
If people had to get private loans than there would actually be some vetting as to the suitability of the degree to pay back, and the potential of the borrower.
How nice that my orig comment was highlighted, and it engendered a few more comments. Yes, none of us had commented on the orig comment amount why the interest rate is so high relative to the current fed bond market. That's a softball: rates are at alltime lows, and at 6% loan rate less hypothetical 2% current cost of funds that 4% spread of "profit" each yr would be dissipated if only 1 in 25 loans defaulted each yr (i.e., 4%) , and i'm sure it is way more than that. Oh, let's also contemplate admin cost to administer all those loans, particularly those in arrears that require personalized attention. And although i'm 110% behind no bankruptcy forgiveness, as i stated in my orig post but eReader didn't grasp, Obama somehow was able to create forgiveness rules that are outrageous.
eReader and other unrealistic liberals, who don't consider who is going to pay for a nice but unrealistic program, should consider what difference there is between us productive people who pay taxes providing everyone 1) a free PRIVATE college or trade school educ, or why not 2) a lifetime unemployment check. We can't afford either, and many with the right motivation and talent have shown that such an easy street is not necessary for individual achievement or economic growth. So let's realize whenever the govt gets involved, waste occurs at unreasonable proportions. Our current support of community colleges and state universities, and further tax money flowing for research, is plenty without forgiving student loans.
Regarding the underlying question "should we pay taxes to subsidize student loan forgiveness?":
Take three hypothetical families of similar income.
Family Able buys a new car every three years, vactions in Hawaii and saves nothing for college. Child Able borrows to pay for college.
Family Baker Drives the same used car for ten years or more and takes a long weekend at the lake when time allows, and saves in a 529. Child Baker pays for most college with savings.
Family Charlie, the child serves six years in the Army clearing mines in Afghanistan. Child Charlie earns benefits under Montgomery GI Bill and pays for college that way.
When Family Able advocates student loan forgiveness, do you understand why family Baker and Charlie might object to paying taxes to support child Ables's student loan forgiveness?
For student loans to be a viable method of financing an education, the borrower must be willing to repay the loan. The one who benefits from the education should be the one to pay.
1. Assumes all families are able to save money. Family Jammie might have a car with 400,000 miles, only because the Dad can bike to work to save gas money, and never take a vacation and still not be able to pay for their child to go to college.
2. Places blame for bad decisions of parents on the child if you assume it's a parents responsibility to send a child to college. If you don't assume parents are responsible for college expenses then your point is kind of moot, because if a kid could save that kind of money they likely don't need college.
Kids do stupid things. Kids are not worldly. I know plenty of people who regret their education, and would do it differently if they had a second chance. The problem is colleges MARKET to kids telling them that they need college to succeed and that everyone with a college education will succeed.
The system needs to be changed so that our graduates can hit the ground running, which would be a book so I won't go into my ideas here.
The author talks about one such idea to fix the problem, and doesn't even get into forgiveness. She just wants the government to be willing to make less of a profit off of people who can barely make ends meet at their entry level jobs. You can't even get rid of the debt in bankruptcy so it's going to follow around for the rest of their lives either way.
Deb, by paying taxes to cover all pre-k thru 12, then heavily subsidize community college and a substantial part of state u system, i sure don't feel guilty nor do i think civilization will be furthered by paying for defaulted loans by would-be artists, actors, cosmetologists, manicurists, as well as drop-out engineers, scientists, etc. BTW, i did not do well expressing the issue at end of my last post. To clarify, the student loan crisis will occur when there is true accounting for all the unpaid loans that have been endlessly extended, reduced, unpaid etc., and now forgiven by Obama's stupid forgiveness policy that doesn't take into account the underground economy and those who don't honestly report income.
Jack, I don't want to pay for your wars, your stupidity, and your arrogance. Yet I do through my taxes because it benefits us all. I'd rather shut down everything you do and take everything you own based on your foul personality and politics but I don't because it benefits us all. To you and others like you who are out only for themselves, I sayan unprintable cuss word.
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