Poorer Students Do Not Benefit From Lower Student Loan Interest Rates
March 26, 2015
A group of Democrats, led by Senator Elizabeth Warren (D-MA), has unveiled a plan to reduce the interest rate on student loans, allowing many borrowers to refinance. Kevin James, research fellow at the Center on Higher Education Reform, writes that such a reform will not benefit the poorest students:
- According to data from the New York Federal Reserve Bank, 37 percent of the 43 million people currently repaying student loans have experienced delinquency or default at some point.
- However, borrowers who default on federal loans generally have lower balances - think $5,000 rather than $50,000 - relative to those who repay successfully. Some researchers speculate these defaulting borrowers may often be students who dropped out of college.
- A borrower with $5,000 in debt who refinances from 6.8 percent to 3.8 percent (the current rate for undergraduate borrowers) would save a mere $7 per month. At the same time, many other borrowers who are not struggling would get a huge break: One analysis found that the benefits of refinancing would accrue disproportionately to the richest 25 percent of households - often high-income individuals with expensive graduate degrees.
- It is not that these loan programs are not generous enough. Rather, the existing protections they offer are poorly designed and difficult to use for the people who need them most.
Changes to student loan programs can be expensive, therefore, Congress could consider if expanding loan is worth the cost before adopting Senator Warren's legislation proposal.
Source: Kevin James, "Lowering Rates Isn't the Answer," American Enterprise Institute, March 24, 2015.
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