The United States is currently facing a crippling $1.3 trillion student loan crisis; that amount continues to grow at a pace of $2,726 every second. The student loan debt burden outpaces credit card debt and auto loans. 40 million Americans carry some kind of student loan, and nearly 75 percent of graduates have debt. This poses a significant threat to the U.S. economy, as millions of borrowers struggle to keep up with their payments. As a consequence, college graduates are delaying buying a home, getting married or even launching their own business, limiting small business development and growth.
Stagnant wages present another problem. Previously, a college degree was viewed as a ticket to a well-paying career. However, with so many new companies requiring degrees for jobs who never needed them before and with wages not keeping pace with inflation, millions of Americans are unable to keep up with their debt payments and end up defaulting on their loans.
The student loan issue is a major problem we are facing right now, and to date, the federal government has been unable to come up with a solution. Limitations on how federal loans can be handled keep debtors from ever making progress and paying down their debt. Instead, the private student loan industry has stepped up to make student loans manageable and help bring an end to the debt crisis.
Federal Student Loans
According to Time Magazine, 90 percent of student loan debt today is in the form of federal loans. They are the most common for a number of reasons. First, federal loans do not require a cosigner like private loans do. For private loans, if your income and credit do not meet certain standards, you will need a parent or friend to co-sign on the loan with you, meaning they are liable for the terms of the loan. If you default on the loan, your cosigner is responsible for paying it back. That can add a lot of tension to relationships, so federal loans that don’t require a cosigner are much more attractive to many people.
Federal loans also offer several different repayment options, such as income-based repayment plans or income-contingent plans, where payments are based on a percentage of your discretionary income. Federal loans also have fixed interest rates, but in some cases, they can be quite steep; they can be as high as six to eight percent.
Why Federal Loans Cannot Be Refinanced
Federal student loans are very different from any other kind of debt. The free market does not determine interest rates or repayment terms for student loans; Congress does. Federal student loans are not secured by any kind of collateral. For example, if you defaulted on your car loan, your car could be repossessed. But with federal student loans, all the government can do is send your debt to collections and, in some cases, garnish your wages. There is no collateral or physical investment they can take from you, which makes the loans riskier in the eyes of the government.
Most federal loans have an interest rate of six percent, double that of your average mortgage rate. Student loan debt is a significant money earner for the government. They make a lot of profit off of interest payments on current loans. According to the Center for American Progress, the government will bring in a profit of over $34 billion on student loans, an asset to the government’s budget.
As a result, the federal government does not offer any options to refinance your student loans. You can refinance your mortgage and even your car payment, but not your loans—not through the government at least. They do not want to lower interest rates and risk losing billions, so borrowers are left to look for alternatives on their own.
How Private Loan Companies Solve the Problem
That is where private loan companies can be a game-changer. Many people do not realize that, while the federal government will not refinance your loans, you can refinance federal student loans with private lenders.
Each day, private loan companies see borrowers looking for help and options to manage their debt load. Working with these businesses, you have several potential solutions, including refinancing your debt and consolidation.
One of the most common myths is that private loan companies have higher interest rates than federal loans, but that is simply not true. Depending on your credit and financial situation, you could qualify for an interest rate as low as two or three percent, less than half what you’d pay with many federal loans. For borrowers and families looking for solutions to their debt problems, private loan rates can be a competitive, or even superior option, to federal loans.
You can refinance your federal loans, and any private loans you may have, through a refinancing agreement with the organization. Hopefully after graduation, you are working, bringing in a stable income and have a stronger credit history than you did when you entered college. If that is the case, you can get a new interest rate that is much lower than what you pay now, saving you thousands over the course of your loan.
Additionally, you can also consolidate your loans with the federal government. In this method, you essentially take out one loan that covers all of your other student loans, both federal and private. That means you will then have one easy payment to make each month at a potentially lower interest rate, or extend your repayment period, so you have a more affordable monthly payment.
Managing student loan debt can be frustrating, overwhelming and depressing, but it is important to know that you can do something about your high-interest federal loans if they are still lingering over your head. Taking the time to look up your options and consulting with private loan companies can help you identify the best solution for your situation. You can end up saving thousands of dollars, decreasing financial pressure on you and giving you peace of mind as you pay down your debt more efficiently.