Student debt is treated as a different animal than other kinds of debt, including home mortgages. About 90 percent of student loans are held by our government rather than private lenders because policymakers have determined that the United States should do all it can to help its students afford a college education. Government loans don't operate like other loans. They have many perks—low-income subsidies, a variety of repayment options, and wide availability. They also have a downside. Older loans at high interest rates can't be refinanced, for example. And no matter how hard the government tries to make the process seem simple, it isn't.
Talking last week with Brendan Coughlin, Head of Education and Auto Finance at RBS Citizens Financial Group, I began to wonder why student loans are seen as different from other kinds of loans. In January, Citizens rolled out a product allowing borrowers to refinance their private student loans. Relatively new to the student loan business, it didn't occur to company officials to offer refinancing until now, when its first borrowers from 2009 are graduating and want to tweak their loan terms.
"We were hearing more and more from them. Do we offer the ability to think about how they restructure their loans? Our answer was no. We paused and said, 'Wait a second. This is a key fundamental need for our customers," Coughlin said.
I find it odd that refinancing isn't the norm for private student loans, since they function very much like mortgages and other private loans. The Consumer Financial Protection Bureau said in last year's annual report on private student loans that the largest number of complaints it receives come from borrowers who can't modify their loans.
The federal government can be forgiven for tinkering with student borrowers' rates more carefully than the private sector because it takes on a greater risk in lending to a bigger borrowing pool. Still, Sen. Elizabeth Warren, D-Mass., wants to push refinancing into the public sector. Older loans are collecting interest at rates of 7 percent to 9 percent, creating "obscene profits for the government," Warren said last month. (It's also worth noting a recent blog from the Brookings Institution arguing that Warren's refinancing idea for government loans would benefit wealthier families.)
At the heart of this debate is the perception of uniqueness of student loans. They are viewed as a different kind of debt than mortgages or car loans or even your basic credit card bill. Yet at the end of the day they still carry IOUs and they still accrue interest. Maybe they shouldn't be treated as quite so special. And maybe there are better ways to help lower-income families send their kids to college than be easy access to borrowed cash.
We should be comforted that the United States is not the only country where student debt is a problem. British Commons Business Committee Chairman Adrian Bailey said last week that unpaid student debt in the United Kingdom amounted to a " fiscal time bomb." About 45 percent of borrowers can't pay back their loans, and the government may have to eat the loss.
On this side of the pond, the issue is perennial and not pretty. Time ran a story last month with the following title: " Student Loans Are Ruining Your Life. Now They're Ruining the Economy, Too." Consumerist reports that one in three student loan borrowers may be delinquent.
For our insiders: What is the benefit of student debt? What is different about it than other kinds of debt? Do borrowers fully understand that they are taking on a major debt burden when they are exploring college financing? Or do students tend to see the loans as free money? Why can't many borrowers refinance their when interest rates change? Should refinancing become the norm?
(Note: This is a moderated blog on education issues. Comments are approved on a case-by-case basis. Contact me if you want to be a regular contributor.)
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