You
may know that the federal student loan program makes an immense profit. But
while that may be the case, not every student is profitable. In general, the
government uses money it makes from the most reliable borrowers, particularly
graduate students and the parents of undergrads, in order to subsidize generous
terms for riskier undergrads who tend to default on their debts in large
numbers.
Education loans |
That's
why I can't help but feel a little nervous reading this piece from Quartz's
Shelly Banjo about top companies that are now helping their young employees pay
off or refinance their student debt. Credit Suisse, for instance, is now
helping workers get an extra 0.25 percent off their interest rate when they
choose to refinance with SoFi, a startup that apparently has similar deals with
200 employers. It's a nice perk, and I imagine other corporations looking to
attract top graduates will start following suit. Which should probably give the
Department of Education fits.
The
student loan refinancing industry operates on a pretty simple principle: A lot
of high-earning borrowers get a relatively raw deal on their government student
loans, so it's easy to offer them better terms while still making a profit.
This is because the Department of Education doesn't have any underwriting
standards—no matter how big or small a credit risk a borrower might be, they
get the same interest rate. So an aspiring software engineer at MIT, who will
probably have no problem paying off her debt after graduation, gets the same
deal as a community college student who's likely to drop out and possibly
default. From a social fairness perspective, this make sense. But it leaves an
opening for companies like SoFi to come along and pick off valuable borrowers
by offering a new, low-interest loan to pay off their old government debt.
They're just skimming the cream off the top.
On
its face, none of this is bad from a consumer standpoint. But by hooking up
with employers, student loan refinancers stand to gain an enormous amount of
free marketing and new business. And as the benefit becomes more widespread,
it's easy to envision a situation where the government loses a significant
fraction of the borrowers who now essentially make the student loan program
self-financing. That could mean the deficit will end up growing a bit, or (more
likely) Congress will decide to increase interest rates for the remaining
borrowers who are still in the federal program—who will also, sadly, likely be
the ones least able to pay. And, of course, the more the government hikes
rates, the easier it becomes for refinancers to swoop in and snatch more
business. Theoretically, at least, you can imagine a death spiral of sorts
forming.
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Comment
If
the government has a problem with losing "good" borrowers such as
myself, they can make my interest 2.5% like the company I consolidated
with. Sorry, I'm not paying 8.5% just
because the government makes poor loans.
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A
necessary disclaimer: I might just be hyperventilating here. Startups like SoFi
are, well, still just startups, and it's entirely possible that Education loans refinancing
will just remain a niche without much in the way of federal budget
consequences. It's also possible the government could head the whole problem
off by lowering rates a bit, either for graduate students, who tend to be the
juiciest targets for private refinancers, or maybe even across the board. But,
as I've said before, I think the issue at least bears watching.
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