Why It’s Hard to Modify or Refinance Student Loans


The numbers are scary. College students, dropouts, and graduates owe more than $1 trillion in loans, and the default rates are skyrocketing. For hard-pressed homeowners, there are a number of ways to modify or refinance mortgages to help reduce payments. Not so for student borrowers. Here’s the lay of the land:

Borrowers who are current on federal loans
Thanks to the Federal Reserve, interest rates are still near record lows, but student borrowers would never know it. Federal loans are locked in at 6.8 percent or higher for most students, with the exception of those who demonstrate financial need. Students can consolidate their federal loans, but the new ratebecomes the “weighted average of the interest rates on the loans being consolidated,” not the prevailing market rate, according to a Department of Education explainer. Only Congress can change this.

Borrowers who are current on private loans
For borrowers with private student loans, there are few options. Only about a half-dozen lenders offer consolidation loans. Borrowers need sterling credit or a co-signer to qualify for the lowest rates. Some borrowers ask parents to take a home equity loan to pay off their student loans and then repay their parents, but as Rohit Chopra, the Consumer Financial Protection Bureau’s student loan ombudsman, says, “That doesn’t appear to be a real scalable solution.”

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