Here’s a riddle: How does an exceedingly expensive, regressive redistribution of federal dollars turn into a college affordability proposal embraced by progressives?
Here’s a hint: It involves a lot of talk about the burden of student loans without actually addressing the needs of the people who struggle the most to pay back their debts.
Student loan refinancing — the answer to our riddle, by the way — often gets sold as a commonsense solution to the burden faced by borrowers holding student loans, which now total over $1.5 trillion nationwide. Interest rates on student loans often exceed that of other types of consumer debt, and borrowers who took out federal student loans in past years are still paying the fixed rates that were set when they were in college, which are often higher than those available to borrowers enrolling today.
At the same time, researchers, policymakers and the public are all talking about how college has grown increasingly unaffordable, placing a postsecondary education out of reach for far too many and leaving others with debt they can’t repay.
Enter refinancing: If only borrowers could reduce their interest rates, its proponents say, they’d be able to pay back their loans on time, improving their own credit and financial well-being while supporting the integrity and sustainability of the federal loan program.
So what’s not to like?
First off, refinancing is incredibly expensive. In 2014, the Congressional Budget Office estimated that Sen. Elizabeth WarrenElizabeth Warren11 senators urge House to pass .5T package before infrastructure bill Senate Democrats seeking information from SPACs, questioning 'misaligned incentives' UN secretary-general blasts space tourism MORE’s refinancing plan would cost just shy of $60 billion over a three-year period, or twice the annual cost of the federal Pell Grant program.
With a price tag like that, you’d assume that borrowers would see significant relief. But the New America Foundation found that, while such an approach would benefit a slight majority of households with student debt, the average savings would be tiny: $8 per month, or $941 over the life of the loan.
And benefits are greatest for borrowers who completed a bachelor’s or graduate degree, because they tend to stay in school longer and take out more debt. That also means that the very borrowers who struggle the most to repay — those who leave college without a degree — see the smallest benefits, while those with the highest education levels and incomes save the most money.
That’s the opposite of how an effective affordability proposal should work, and it’s contrary to the idea of equity, which ensures that everyone is provided the opportunities and resources they need to succeed.
Media coverage of the “student debt crisis” often focuses on high-balance borrowers, but research consistently shows that the real crisis is concentrated among a few populations, including borrowers from low-income families, black borrowers, those who enroll at for-profit colleges, and those who don’t finish a degree. Given that reality, a widely available but minimally impactful approach benefiting the borrowers with the highest balances is simply the wrong approach.
Students, families and taxpayers would all be better served if federal funds were used to make college more affordable and reduce the need to borrow in the first place, and to provide targeted relief for those who struggle the most to pay their loans.
The most straightforward way for Congress to reduce college costs for low-income students is to increase the maximum Pell Grant, which is currently at its lowest purchasing power in over 40 years. Ed Trust joined 35 organizations earlier this year in urging lawmakers to invest in the Pell Grant program and reduce the debt burden among students with the most need. Policymakers should also think creatively about partnerships with states to advance college affordability, including through equity-driven free college programs.
Congress can provide more effective debt relief by strengthening and targeting income-based repayment and loan forgiveness programs. Colleges should also work to reengage former students who have dropped out, including by forgiving institutional debts that often act as a barrier to reenrollment, as in Wayne State University’s Warrior Way Back program. And lastly, policymakers must work to improve graduation rates and postsecondary quality by supporting institutional improvement and by holding campuses accountable for student outcomes.
Like many proposals, refinancing may sound great on the surface, but it gets devilish in the details. It’s up to advocates to dig into those particulars and hold policymakers accountable for keeping their promises to design effective and equity-driven polices.
Katie Berger is senior policy analyst for Higher Education at The Education Trust. Follow her on Twitter @katielberger