What the Potential Privatization of Student Loans Means for Future Borrowers

Student loan debt has become one of the biggest financial issues facing Americans today. According to studies, more than 43 million Americans have student loans. The loans that were given to those 43 million people represent more than $1.7 trillion. It’s a hot-button topic that has been at the center of political debates for years. Now, there is a new wrinkle when it comes to student loan debt with the news that student loans may become privatized.

Admittedly, the idea of shifting the federal student loan program into the hands of private lenders isn’t new. It’s something that’s been tossed around for years. However, the topic is picking up more steam than it has in quite some time.

What would privatizing student loans mean for future borrowers? Is it the right step to fix a broken system, or would it simply introduce more problems to an already flawed system? Keep reading to learn more about what’s at stake and what student loan privatization could mean for you and future generations.

What Does "Privatizing Student Loans" Actually Mean?

At its core, privatizing student loans means that the control and management of student loans would go from the federal government to private companies. In the same way that you can get a mortgage from a private lender, students would be able to get student loans from a private lender. Currently, the U.S. Department of Education oversees the vast majority of student loans. The department’s work includes setting interest rates, offering income-based repayment plans, and managing loan forgiveness programs.

With President Trump having vocalized his plans to either revamp or eliminate the Department of Education, many are wondering what would happen to the student loan program. Ultimately, it would likely be passed off to private lenders, an idea that has been discussed for more than 20 years.

If student loan privatization were to happen, banks, credit unions, and private financial institutions would take over the lending process. Borrowers would apply directly to these companies for student loans, similarly to how private loans work today. However, it would be on a much larger scale.

There is also a possibility that the shift would take on a hybrid look, in which federal and private loans coexist, but new borrowers are encouraged to seek their loans from a private institution. The details are still unclear, but the concept of bringing in private lending to the world of student loans has a long list of potential benefits and drawbacks.

The Potential Pros of Privatization

Anytime you talk about changing something that’s been in place as long as the current student loan system, people get nervous. While many people have shared their concerns about private lenders potentially taking advantage of college students, proponents of the plan point to just how out of control the debts have already become.

Based on studies, the average student loan payment is around $536 per month, but many borrowers have pointed to how hard it is to completely eliminate their debt by paying that amount, thanks largely to the interest rates associated with their loans. With all of this in mind, let’s look at some of the potential benefits of student loans going private.

One of the universal rules of business is that competition improves service. While many people don’t want to acknowledge it, the student loan industry is ultimately a business. Right now, there’s virtually only one option, the federal government, when it comes to student loans. If multiple private lenders were allowed to start offering loans, borrowers may find lower interest rates by shopping around. Additionally, more competition could lead to more innovative repayment options, which could greatly benefit borrowers, especially those who are responsible about repaying their loans.

Under the current system, everyone gets the same rates on their loans. Whether you have a proven history of repayment and a high credit score or you’ve never taken out a loan before, your interest rates and repayment terms are the same. Additionally, your income has nothing to do with your repayment plans. This is because the policies that govern the Department of Education’s management of these loans makes it illegal to offer different terms to different borrowers. Under a privatized system, borrowers with strong credit scores may be eligible for lower interest rates. For some borrowers, this could lead to paying thousands of dollars less over the life of the loan.

Some of the benefits associated with privatizing student loans have little to do with borrowers. Instead, there are potential benefits that taxpayers could enjoy. Right now, federal student loan programs cost the government billions of dollars every year. With rising numbers of defaults and expanded forgiveness programs, that bill gets passed on to the taxpayer. In theory, privatizing loans could shift the financial risk from the taxpayer to the company issuing the loan.

The Cons: Why Many Are Concerned

Obviously, it’s not all upside. As is the case with any type of lending program, there are some potential drawbacks to be considered. Many opponents of the shift to privatization fear that making student loans private could make things worse, especially for more vulnerable borrowers.

Currently, federal student loans come with some important protections like income-based repayment plans. There are also deferments and forbearance options, though it’s sometimes difficult to get approved for those programs. Most private firms that offer loans don’t have those types of programs in place, as their primary goal is to make money. That’s why they charge interest. Without those programs, people could find themselves in default with little to no hope of getting back on their feet.

It's also worth noting that the risk of higher interest rates could make privatized student loans even more problematic. For older students, those returning to school in adulthood, or even first-time students with high credit scores, being able to get a lower interest rate is appealing. However, many 18-year-olds don’t even have credit scores, which means that they may have to deal with higher interest rates than they can get under the current system.

For years, people have been able to apply for loan relief or forbearance due to financial hardships. It’s safe to assume that if the student loans become privatized, those sorts of offers will go away. Private lenders are far less likely to offer deferment and forbearance based on hardship than the federal government, since lending is their primary source of income.

How Could Student Loan Privatization Improve Things?

If we’re being completely honest, the decision about privatizing student loans won’t be made based solely on what’s best for borrowers. The federal government will make the decision based on what’s best for the economy as a whole. While many people have reservations about the concept of student loans moving into the hands of private lenders, it’s important to note that there could be some benefits.

One of the most appealing potential benefits is found in customizable loan packages. Lenders may be able to set up programs that make repayment plans vary based on the borrower’s major and subsequent career choice. For instance, a loan applicant who wants to go into a field that’s expected to grow in demand, like computer sciences, may get better terms than someone who wants to borrow money to pursue a degree in Latin. While this raises multiple ethical questions, the fact remains that lenders use multiple criteria to determine loan terms in every situation, and they would likely do so if they were to get into student loans.

People who have student loans know how difficult it can be to get answers and assistance. Even if you go through an online portal for help, you often spend hours trying to find the information that you need. If you’ve ever tried to call for assistance with your loan, you know just how tedious that process can be. If private lenders were competing for clients, they would be far more likely to provide quality customer service, which could make things easier to navigate for borrowers.

What to Watch For

If you’re currently paying back your student loans, you’re probably wondering what this could mean for you. Is the federal government going to sell your loan to a private lender? That remains to be seen, but it seems like the most likely path. If you or someone you love is going to be entering college in the coming years, this is a situation to monitor.

Start keeping up with what’s happening with the Department of Education. If it’s disbanded, it’s safe to assume that student loans are going to be privatized. Until then, millions of Americans watch and wait to see what comes next.