As outstanding student loan debt has roughly tripled in the past decade to reach $1.2 trillion, many people have pushed for measures that would reduce the repayment burden on former students. In the last few years, there were efforts to stop subsidized student loan interest rates from doubling (which were largely successful) and more generous income-based repayment programs on federal loans, as well as efforts for tuition-free and/or debt-free public college that have taken center stage in the Democratic presidential primary.
The latest effort to reduce debt burdens has been allowing students to refinance their student loan debt at a lower rate. Private companies such as SoFi and Earnest are expected to refinance between $10 billion and $20 billion in loans in the next few years, primarily of well-paid professionals who are extremely unlikely to default on their obligations. (By doing this, loans become private—so this isn’t a great idea for people who would qualify for Public Service Loan Forgiveness.) But for people who have lots of debt and a steady job, refinancing can save tens of thousands of dollars.
Spurred by the #InTheRed hashtag on Twitter and support from some leading Democrats, the next move is to consider allowing all students to refinance their loans through the government. Any legislation in Congress to do so is unlikely to go anywhere with Republican control and concerns about increasing the deficit. As a result, efforts have moved to the state level, with at least seven states having adopted refinancing plans for some loans and others considering plans. But is this a good policy to explore?
While states are free to do whatever they want—particularly if they issued the loans instead of the federal government—I view state refinancing efforts as an inefficient way to help struggling borrowers. Sue Dynarski at the University of Michigan sums up my concerns nicely in 140 characters:
Essentially, further subsidizing interest rates rewards borrowers with larger debt burdens (particularly those with graduate degrees who rarely default on loans) at the expense of students with debt but no degree represents a transfer of resources from lower-income to higher-income families. For a group that draws most of its support from the Left, supporting regressive taxation like this is rather surprising. Additionally, to keep the price tag down, some states are heavily restricting who can refinance and acting more like private companies. Minnesota, for example, will only allow graduates to refinance—and only in that case if they have a good credit score or a co-signer. This could potentially help keep some talented graduates in state, but the magnitude of the benefit is often outweighed by differences in income taxes, property taxes, or job offers across states.
I would encourage states to take whatever money they plan to use on refinancing loans and directing it toward grant aid for students from lower-income families who have stopped out of college and wish to return. Scarce resources should be directed toward getting students through college at a reasonable price instead of trying to make graduates’ payments slightly lower later on.
Robert Kelchen 