A Case for Refinancing Federal Student Loans


By John W. Carroll

A memorable line from Mel Brooks’ comedy classic The Producers asks, “where did we go right?” Washington D.C. funded student loans hoping to make college more affordable. Decades of easy federal money enabled colleges to consume all the money students could borrow, driving up costs at more than four times the rate of inflation. Today, we find ourselves with total student loan debt at $1.4 trillion—which is greater than all credit card debt combined. “Where did we go right?”

As of the end of 2016, student loan debt per capita was about $30,000[1] with some borrowers having balances larger than many Texas home mortgages. With over 44.2 million borrowers, about one in seven people in the US have student loans. Approximately five million are trapped in default or are delinquent.

We have two broad problems to solve. What do we do about existing loans—particularly for those who are stuck in default or delinquency? and, how do we avoid the debt trap in the future?

Refinancing student loans at our historically low 10-year and 30-year Treasury bond rates could provide significant debt relief and lower future debt payments by tens-of-billions of dollars over the life of the loans. Making debt more affordable could move some borrowers out of delinquency or default and into repayment. Offering future student loans at market T-bill rates would save students hundreds-of-billions of dollars in interest payments and it would introduce some market discipline into a decidedly undisciplined market. As of this writing, the 10-year Treasury bond yields about 2.86%[2] and the 30-year note is a little over 3%.

Let’s run some numbers. Consider an existing borrower with a $30,000 loan at the 6.8% interest rate and a 10-year term. That’s a monthly payment of about $345. Refinancing at 2.86% yields a $288 monthly payment, saving $57 per month and $6,840 over the life of the loan. The current student loan rate for undergraduates is 4.45%. Lowering those rates to 2.86% saves $2,663 over the life of a loan.

Washington borrows at 2%-3% and marks-up student loans to 4.45%, 6%, or 7%, costing students tens-of-billions of dollars annually. Why are some loans marked-up more than 200% over the cost of borrowing? We are told those extra funds are needed to pay for administrative costs and write-offs for uncollectible loans. Both explanations are specious.

Rather than marking-up loans, we could charge each loan holder a monthly fee. Make it between $3-$5, which is about the same cost as a commercial cup of coffee or a latte. Factoring out the 11% who are delinquent or in default, the fees would generate between $1.4 and $2.4 billion annually. That’s plenty of revenue with which to administer the program. Regarding write-offs, student loans are one of the few types of debt that can’t be discharged in bankruptcy. The government has no intention of writing-off anything.

Pegging future student loan interest rates to T-bill rates adds some market discipline to borrowing that is largely undisciplined. Students benefit from falling interest rates and, given current rates on student loans, it appears it could be quite some time before T-bills are above the 6% or 7% students are paying now.

Refinancing existing student loans would benefit borrowers and taxpayers, saving both hundreds-of-billions of dollars over the life of their loans. Pegging future student loans to the 10-year and 30-year Treasury bonds forces market discipline where currently none exists. Market driven interest rates, coupled with the ability to refinance when interest rates are low, could save borrowers tens-of-billions of dollars.

Ultimately, student loan financing reform solves one part of the multifaceted problems facing higher education in America. Federal student loans have not lowered costs. They’ve raised them. Easy federal money has failed to lower the cost of production, accelerated tuition growth at over four times the rate of inflation, made tuition pricing opaque and mysterious, diminished consumer sovereignty, and transferred power away from parents and students toward institutions. In some ways, government financing has made higher education worse not better. It’s time to correct course.


Dr. Carroll earned a Ph.D. in higher education administration from the University of Texas at Austin. He holds an MS in Agricultural Economics and an MBA from North Dakota State University. He currently serves as Vice President of Customer Success for a cyber security firm moving from California to Texas.



[1] Friedman, Z. (2017, February 21). Student Loan Debt In 2017: A $1.3 Trillion Crisis. Retrieved from https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#725bb7815dab

[2] Rates as of February 9, 2018.

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