For young people with good jobs, repaying student loans has probably never been easier. In the past four years a growing number of companies have begun offering to refinance people’s federal loans, which generally means buying the debt and then collecting payments from borrowers at a much lower interest rate than the government was charging.
The companies—which include startups and traditional banks alike—say this is an attractive business opportunity because certain graduates are bound to pay back their loans on time. Buying their debt now and collecting small, but virtually guaranteed, payments over time can be a profitable enterprise.
For the people whom these companies target—often graduate school alums—the deal has few drawbacks. Those who refinance public loans through a private company like Social Finance or CommonBond pay less interest over the long haul. They also give up the right to enter into government repayment plans, but it’s unlikely these particular folks would need to rely on such programs, which are aimed at struggling grads.
Sounds like a win-win scenario for all players, except for two: the U.S. government and, by extension, the taxpayer. As Bloomberg reported last week, the boom in student debt refinancing for a few could be bad for the masses. Taking the least risky borrowers—the ones with good jobs and high incomes—out of the pool of those who are repaying student loans makes that pool more risky overall.
Imagine a doomsday scenario (which is unlikely to occur, but still interesting) where private lenders manage to pluck every solvent borrower out of the group of students and graduates indebted to the government. That would leave the rest of us, who finance the loan program and perhaps count on college loans for ourselves or our children, dependent on a set of (theoretically) unreliable people to replenish the government’s coffers. Not fun.
So should the government get in on the refinancing game? Some say yes. The U.S. Department of Education, says Michael Simkovic, a law professor at Seton Hall University, is overcharging certain borrowers, given how unlikely they are to stop paying the debt back. He says it would make more sense to give lower interest rates to people who major in lucrative fields, or those who go to graduate school for certain professional degrees.
“There are college majors that are associated with much better outcomes in the labor market,” says Simkovic. People who get undergraduate or graduate degrees in engineering, medicine, economics, business, or finance should probably get lower rates than they’re getting now, he says. The fixed interest rate for undergraduate federal loans disbursed from July 1, 2014 to July 1, 2015 is 4.66 percent. Simkovic also wants people who go to law school or medical school to get a discount, which he says the government should calculate based on how often certain degree holders have defaulted on their loans in the past.
Not everyone thinks this scheme makes sense, logically or morally.
“If you start saying, ‘Let’s change the terms to give better loans to less risky people,’ then you pretty quickly get to ‘Let’s give worse terms to riskier people,’” says Ben Miller, an education expert at the Center for American Progress. “You’d very quickly have to worry about redlining,” Miller says, referring to the illegal practice of making home loans prohibitively expensive or inaccessible for people of color.
“We’ve already made the process of paying for college extremely confusing,” Miller adds, so why add a new web of complexity to the mix? The other concern Miller has is that giving a discount to, say, anyone who goes to law school assumes all law schools produce similarly successful graduates. “There are some crappy law schools out there,” he says. “At what point do you draw the line?”
Simkovic points to data showing that even people who go to lower-ranked law schools tend to have low default rates, and says that any J.D. holder will probably have a more lucrative career than someone with a degree in film, for example. He also says the discounts wouldn’t be unfair to certain social groups, since any informed person can decide to major in computer science.
“What you choose to study is a choice,” Simkovic says. “It’s nondiscriminatory, and it’s predictive” to lower rates based on that choice. Of course, in a country where your ability to acquire knowledge is affected by your parents’ wealth as early as kindergarten, it isn’t totally clear how much of a choice Americans have in the matter.