One of the toughest things about student loans is the inflexibility. Granted newer programs like Income Based Repayment (IBR) and Pay As You Earn (PAYE) have opened up more reasonable income sensitive payments for those that qualify, overall there’s not a lot of wiggle room. Other similarly significant financing arrangements like mortgages have the ability to be easily refinanced if you have decent credit.
But for student loans, outside of consolidation, the deal you get is the deal you get – and that’s especially bad if the deal you got was raw. Interest rates hit a high in the late 1990s of 8.25% compared to the current rates of 3.45%. That’s more than double the interest! This interest differential can equate to $60 more a month on a $25,000 balance and almost triple the dollar value of interest.
When mortgage rates drop, people rush to refinance their homes to get better deals. If you get a lower interest rate credit card offer, you can transfer your balances. You can even refi an auto loan. But student loans? You’re just stuck. The Center for American Progress agrees that this is not the way it should be and is pushing for a better system.
CAP said, “Providing student-loan borrowers the opportunity to refinance their debt is a way to solve a significant portion of the growing student-debt problem. Refinancing could significantly reduce monthly payments, increase repayment rates, and stimulate the economy by freeing up a portion of each student-loan borrower’s income that could be spent in other sectors of the economy or saved for larger purchases.”
In their analysis of how allowing student loans to be refinanced at more preferable rates would affect the government and the economy, CAP found that the result would be akin to that of mortgage refinancing. Last year, the New York Fed wrote about allowing (and encouraging) those with higher mortgage rates to refinance at much lower rates: “Refinancing is not a zero-sum game and can benefit the entire economy. The greater the scale and scope of the refinancing program, the larger these benefits are likely to be.”
So yes, while allowing federal student loan debtors to refinance at lower rates would “cost” the government some money, the ripple effect in the economy would like be exponentially more positive. Those with less to pay in student loans would purchase homes and autos which would then stimulate these industries, driving job growth, economic stability and all those other related effects that come from economic stimulus.
The ultimate cost of the 2009 stimulus package is estimated to be $1.2 trillion dollars (coincidentally the current amount of all student loans). Imagine if even a portion of that investment was put toward loan forgiveness or refinancing what the resultant economic impact would have been – probably much more than the public works projects that cost so much but ultimately put so few to work and now must be maintained. With student loans generating billions in profit each year, it seems like there’s ample financial wiggle room to facilitate refinancing!
If you are coping with student loans – no matter your interest rate – let Tuition.io help! Sign up for our free student loan management tool to deal with your debt efficiently and get it paid off as fast as possible. Also, be sure to read our blog and take a stroll through our Student Loan Help Center!