By: Tim Hayes Financial Advisor - posted in: Financial & Retirement Planning - Last updated Nov 27, 2018

Financial Advisor Blog

Articles are about big issues affecting readers, individual or corporate.

Banks, Money, the Government, and Student Loans

by | Financial & Retirement Planning

In a perfect world, the government would allow borrowers to refinance their public and private student loans into one loan at a low rate while they continue to receive government protections and forgiveness programs. Until then, borrow wisely, and refinance cautiously.

Harvard College recently invited Financial Advisor Tim Hayes to talk with their law students about their personal financial planning. During those meetings, Tim learned that students have both private and government-sponsored student loans. He was not able to offer much help, as he did not know a lot about the student loan repayment process.

So, he figured, if he were ever invited back, he had better read up on how this $1.23 trillion of student loans is going to get paid. After researching the refinancing and repayment maze, Tim decided to use his experience with the Harvard students as the topic for his June article in SOCO & New England Monthly magazines.

Students Have a Combination of Private & Government Loans

Only a private sector lender will allow a student to take advantage of today’s extremely low rates and refinance their private and government loans into one new loan. However, if a student refinances their government loans, they lose protections that government loans give. Such as the option to limit their monthly payment to a % of their income; to stop payments if a financial hardship arrives. Moreover, the capacity to have a portion of their government loan forgiven if they work in a particular job.

Some Private Lenders Are Not Banks

One intriguing and potentially problematic aspect of the private refi market that Tim was not able to fit into his article is that some of its biggest providers, such as SoFi are not banks.That means, unlike banks they can’t create money. Yes, banks create money when they make a loan. Read Paul Sheard’s article, Repeat After Me: Banks Cannot And Do Not “Lend Out Reserves”. On how banks create money. (Paul is the Chief Global Economist at Standard & Poor’s)

Because they cannot create money, non-banks need constant inflows of money from investors so they can lend to new borrowers. Plus, non-banks can not rely on the Federal Reserve as the lender of last resort. (As much as we bash the Fed, if they did not act as the lender of last resort, we would have had a depression in 2008.)

So if there was to be another financial crisis like in 2008, where funding freezes up, a non-bank lender could find themselves unable to get money from investors or from the Fed.

Students Have a Combination of Private & Government Loans

Only a private sector lender will allow a student to take advantage of today’s extremely low rates and refinance their private and government loans into one new loan. However, if a student refinances their government loans, they lose protections that government loans give. Such as the option to limit their monthly payment to a % of their income; to stop payments if a financial hardship arrives. Moreover, the capacity to have a portion of their government loan forgiven if they work in a particular job.

Some Private Lenders Are Not Banks

One intriguing and potentially problematic aspect of the private refi market that Tim was not able to fit into his article is that some of its biggest providers, such as SoFi are not banks.That means, unlike banks they can’t create money. Yes, banks create money when they make a loan. Read Paul Sheard’s article, Repeat After Me: Banks Cannot And Do Not “Lend Out Reserves”. On how banks create money. (Paul is the Chief Global Economist at Standard & Poor’s)

Because they cannot create money, non-banks need constant inflows of money from investors so they can lend to new borrowers. Plus, non-banks can not rely on the Federal Reserve as the lender of last resort. (As much as we bash the Fed, if they did not act as the lender of last resort, we would have had a depression in 2008.)

So if there was to be another financial crisis like in 2008, where funding freezes up, a non-bank lender could find themselves unable to get money from investors or from the Fed.

Please Share

Get Notified When Posts Are Published

Enter your email address to receive notifications of new posts by email.