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Refinancing Student Loans Would Help Low-Income Borrowers

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Yale University. If borrowers could refinance their student loans, there might be fewer low-income Americans on the outside looking in.

CREDIT: Flickr/CanWeBowlPlease

Campus Progress is pushing for game-changing solutions to tackle the student debt crisis.

One way we’ve suggested to lessen the burden for millions of Americans is to allow borrowers to refinance their student loans. The idea is simple: Give student borrowers the same benefits that mortgage and credit-card borrowers have enjoyed recently. Allow them to refinance their loans to better interest rates. This would help lower monthly payments, giving graduates the ability to actually pay off those debts and put more money into the struggling economy.

Low-income students, in particular, face a sobering future. While their degrees bring hope for successful careers, lacking financial help to get those degrees—either from parents, savings, or other means—translates to a high debt load when they graduate. And with a staggering economy to enter and high loan payments, those with the greatest need are having a hard time paying off those loans.

(Read More: It’s Our Interest: The Need To Refinance Student Debt)

Both universities and the federal government offer financial aid for needy students, but it frequently pales in comparison to the cost of college. Pell Grants offer a maximum of $5,550 per year to qualified borrowers, but good luck getting a degree at that price. So for many Americans, the only route to a college degree is debt. Often, a lot of debt. And that means a lot of interest.

Struggling to Pay for College, Yet Willing to Invest in Education

“American University was one of the top schools in the country for international relations, and that’s what I wanted to do,” said Natalie Smith, who graduated in 2011 and knows the author of this piece. “When you’re 18, the cost of tuition is a very abstract number.”

AU’s price tag was beyond the means of Smith and her mother, so she went all-in, taking out more than $150,000 in loans from Wells Fargo over the course of four years. Her monthly payment? A whopping $1,300.

Roughly $850 of that goes toward her interest, which averages around 8 percent between the loans. She works long weeks—typically upward of 60 hours—waiting tables at Washington, D.C., restaurants in order to cover the cost.

Smith’s may be an extreme case, but similar themes emerge even in less dramatic stories.

Take Kristofer Dowdell, a senior at Frostburg State University.

“I was not able to receive a lot of other forms of financial aid since my expected family contribution was pretty high, around $8,000,” he said.

But what the federal government determines to be the expected contribution from a student’s family and what families actually do contribute can be very different. When Dowdell gets his communications degree, he’ll have $40,000 worth of subsidized and unsubsidized federal Stafford loans to repay.

“I did not want to cause my mother undue hardship to pay for my college education, since she is a single mom and also had to support my two other siblings as well,” he wrote in an email.

Tosia Klincewicz, a junior studying English and art history at University of Puget Sound and the editor of Wetlands Magazine, a Campus Progress supported student publication, said she ultimately took out loans because her mother wasn’t able to pay for her to go to college, and she wanted a four-year liberal arts education. She’ll graduate with around $40,000 of debt, mostly owed to the federal government.

“It’s pretty scary to think about graduating with so much debt, but I don’t regret my education, and I know I’ll pay it off eventually,” she wrote in an email. “My family has never had money, so it’s not like I have expectations of graduating and living a cushy lifestyle anyway.”

Easing the Budgets of Borrowers Who Need It Most

Refinancing may not lead to a cushy lifestyle, but it would offer significant relief to borrowers who are struggling. For Smith, the American University grad, refinancing to a 3 percent interest rate would save more than $400 per month, and almost $75,000 throughout her 15 years of repayment.

While refinancing would not only ease the budget of borrowers who need it most, it also might help them reach some of middle-class life’s biggest milestones.

“Every dollar that’s going to pay interest on your student loans isn’t going somewhere else in the economy,” said Joe Valenti, the director of asset building at the Center for American Progress, our parent organization.

If refinancing were allowed, he said, “you may see young people moving out on their own, starting more households, spending more. What I would hope to see is that they’re not just spending more, but that they’re able to save and plan for the future and think about goals like homeownership and retirement.”

“One rule that some financial planners will say is that your total student loan debt shouldn’t be more than the ideal salary you hope to make when you’re coming out of school,” Valenti said. So if you’re planning to be a teacher, for instance, you should try to limit your debt load to about $30,000. “Either if your student loans are higher than that, or your job prospects aren’t as good, that’s when you really get into trouble.”

Dowdell, the senior at Frostburg State, said he’s confident that he will be able to repay his loans. His case demonstrates the value of refinancing, though, based on Valenti’s starting salary metric. According to the National Association of Colleges and Employers, communications majors earned an average starting salary of $43,717 last year. At his current interest rates, Dowdell would pay back a total of $51,239 over 10 years. That’s well out of bounds. But if he refinanced to 3 percent, he would end up paying almost $5,000 less, putting him within striking distance of the target figure.

Though there are other barriers to accessible education, refinancing student loan rates is one way to tackle the student loan debt crisis in a meaningful way. For many lower-income folks, education is the only fruitful path to economic security so ensuring that it remains an investment—rather than an impediment—into realizing one’s full potential is crucial to upholding the American Dream. Every American, regardless of their economic station doesn’t deserve success but they do deserve a fair shot at it.

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