You can refinance a car, but not a student loan

Graduates

Atmosphere during the David Geffen School of Medicine at UCLAs Hippocratic Oath Ceremony on May 30, 2014 at Westwood, California.

You can refinance payments for a house, a car, even a boat. So why can you not negotiate a better deal for your federal student loans and get out from under all that debt?

"Well you actually could," says financial aid expert Kantrowitz, "there’s no pre-payment penalties on student loans, federal or private."

So even though you could borrow from a private bank to pay off your government loan, the problem, says Kantrowitz, "is there aren’t lenders who are willing to beat the low rates on a federal education loan."

3.86 percent is the interest rate for a federal Stafford loan - if you got it today. But lots of borrowers have older loans with much higher rates. And, loaning money to students can be risky -- one in seven students defaults.   

"If you buy a house or a car and you default on that loan, the lender can reposses the car or foreclose on your house. An education lender can’t repossess your education," he says. 

But if Massachusetts Senator Elizabeth Warren has her way, students would be able to refinance their federal debt with a lower rate from the government.

David Bergeron, vice president for post secondary education policy at the Center for American Progress, says the long term solution isn't interest rates, instead it's reducing the amount of debt and the cost of college.

Though, he notes, giving students the option to refinance loans could free up an average of $2000 a year per borrower: “Refinancing would not make the underlying debt that a person owes go away,” he said. But if that money is spent on consumer goods or used towards a down payment for a house, it could help spur the economy rather than going straight to the government which stands to make almost $70 billion from the interest on loans issued between 2007 and 2012.

About Senator Warren's new proposal, “The government will still make money," says Bergeron, "it just won’t make as much money.”

About the author

Sally Herships is a regular contributor to Marketplace.

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