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Why Student Loan Debtors Are Not Refinancing

Man carrying booksAt first glance it might seem more than just a little odd that a large number of debtors surveyed were reluctant to take advantage of alternative “non-government” financing options—i.e. refinancing their student loans for a more attractive interest rate. This begs the question: why won’t a larger number of student loan debtors take advantage of refinancing alternatives that would lower their effective interest rate?

A poll has shown that a primary reason debtors are not refinancing and securing lower interest rates is the attractiveness and flexibility of the government’s “income-driven” repayment option. Apparently, many student loan debtors are fully aware of their options, but have opted out of their refinancing opportunity.

According to Bloomberg, “the debtors who have opted out of refinancing say that they don’t trust the banks. And besides, a lower rate isn't always worth giving up flexibility.” To quote an interviewee: “Going to the private sector for financial advice, especially with student debt, feels fraught,” he explained. “There aren’t government resources that could clearly explain the proper way to manage student debt that would be more trustworthy.”

Also noted by Bloomberg, according to a poll of 1,001 American student debtors, 20.1 percent pointed to the federal loan option that ties payment amounts to what they're earning, and they didn't want to risk losing it by refinancing. Out of the total number of interviewees who had already refinanced their debt the majority, 39.4 percent said they weren't sure that a low-interest rate was worth the trade-off. In other words, they did not want buyer’s remorse that would come from switching to a lower rate but losing the government’s flexible repayment options that keep monthly payments manageable and relative to income.

Apparently, the perceived value of the “income-driven repayment option” is more appealing to a significantly larger number of student loan debtors.

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