Student Loan Refinancing May Not Be the Silver Bullets Advocates, Policymakers Think It Is
Since proposed on the 2016 presidential campaign trail, calls to allow student loan borrowers to refinance their debt and take advantage of lower interest rates have increased, gaining bipartisan support in the Congress and from the White House. But is student loan refinancing really the solution to the country’s growing student loan debt among low-income individuals?
Not so much, according to a new paper
from New America that found that a significant portion of the benefits of student loan refinancing would go to a small number of households with high debt balances instead of the lowest-income borrowers who are most in need of relief.
For their paper, Kim Dancy, a policy analyst with the Education Policy program at New America, and Alexander Holt, an independent consultant in Washington, DC, used data from the 2013 Survey of Consumer Finances to examine the interest rates, monthly payments, and total remaining debt owed among federal student loan borrowers to determine how refinancing would impact each factor. They found that while many households would be eligible for refinancing, only a small majority would reap the benefits.
Overall, 52.8 percent of households with student loan debt would be able to potentially lower their interest rate through refinancing, and the drop would be minor, going from an average of 5.8 percent before refinancing to an average of 4.2 percent after refinancing. In terms of dollars saved, households would only save an average of $8 a month, with the smallest savings occurring among borrowers with some college debt but no degree, who would save an average of $7 per month. Borrowers with bachelor’s degrees and advanced degrees would save the most at $9 per month.
The monthly savings for the average household would average out to about $941 over the remaining life of a borrower’s loan, while borrowers with bachelor’s degrees would save an average of $1,111 over the life of the loan.
Households with the highest incomes stand to gain to most from student loan refinancing, according to the paper, as they would save $10 per month compared to only $6 per month for households with the lowest incomes. According to the paper, this is because most borrowers with higher income levels tend to hold college degrees and have borrowed larger amounts of debt to pay for college than low-income households.
Instead of focusing on student loan refinancing to help borrowers, Congress and other policymakers should “know that a more targeted and generous program already exists” through income-based repayment (IBR) programs, Dancy and Holt write. IBR would offer enrolled low-income borrowers lower monthly payments and the possibility of loan forgiveness after a certain period.
Dancy and Holt write that rather than “expending significant taxpayer dollars on a poorly targeted, complex program,” Congress should instead:
- Allocate funds to making moderate improvements for current IBR plans;
- Increase outreach to low-income, delinquent, and defaulted borrowers about the benefits of IBR;
- Encourage the Department of Education (ED) to create process linked to the internal Revenue Service (IRS) to make it easier for borrowers to enroll, and remain in, IBR; and
- Reform IBR so that loan forgiveness is tax free, which will cost less than $50 million.
Publication Date: 6/22/2017