This week millions of people returned to the classroom at college campuses right across the country. There are no less than 43.3 million Americans, including 25.9 million below the age of 40, holding at least some amount of student loan debt. In fact, there are few issues that can claim a broad ranging coalition of eligible voting men and women, who are both young and old, rich and poor, spanning every ethnicity and culture, like student loans.
Americans hold an astounding $1.2 trillion in student loan debt and the Class of 2015 graduated with more student loan debt than any class in history. In an era of partisan politics, there is no arguing that student loan reform appeals to a great deal of potential voters struggling with student loan debt. In particular, student loans are a key issue in the early primary states like Iowa and New Hampshire, whom are struggling with student loans as seen in this brilliant infographic.
Candidates on both sides of the aisle are looking at student loan refinance as a way to connect with 43 million constituents and it could well be the harbinger issue at the 2016 election. Earlier this month Hillary Clinton released her long awaited student loan reform proposal, becoming the first candidate to publicly declare a detailed plan. Included within Clinton's New College Compact is the idea of federal student loan refinancing. Student loan refinancing is a new and exciting industry with a growing number of private student loan refinance lenders that have entered the market to help creditworthy borrowers save money.
Qualifying for student loan refinance at or below 2% interest rate, usually requires a credit score above 700, low debt-to-income ratio, and annual income over $75,000. The major hurdle is that people who need debt relief most are unlikely to qualify based on that criteria. Refinancing is currently not an option for the 17% of student loan borrowers who are behind on their payments or in default, and only 37% of student loan borrowers are making regular student loan payments. Thus it isn't too difficult to guess why student loan refinancing approvals are low.
Clinton's plan would allow student loan borrowers "to refinance your loans at current rates, with an estimated 25 million borrowers receiving debt relief." Furthermore there are a number of initiatives to "tackle the runaway costs of higher education, make sure that students who start college can finish with a degree, and relieve the crushing burden of student debt." At face value, the Department of Education would be entering the market refinancing loans independent of creditworthiness, and the plan would cost about $350 billion over 10 years financed by higher taxes on high-income taxpayers. If implemented effectively, Clinton's plan may actually increase competition in the rapidly growing student loan refinance industry.
That being said, it is doubtful the private student loan refinance industry is overly worried about the threat of increasing competition. This past week the student loan refinance leader SoFi, just announced a whopping $1 billion in additional funding giving the company a sizable $4 billion valuation. Putting this in perspective, a $4 billion valuation places the company among the top 30 U.S. banks by market capitalization. It is likely to assume that investors weighed the risks of increasing federal competition and concluded Congress may have the final say before anything substantial changes.
It surely looks like student loan debt refinance is going to be a big issue this election season, and Hillary Clinton deserves credit for highlighting the issue and outlining a plan. This issue is only going to attract more airtime as election day approaches and it will be interesting to see how other candidates respond. Independent of politics this issue ought to be addressed in a bipartisan manner. The entire US economy is being held back by the economic limitations of 43.3 million Americans straddled by $1.2 trillion in debt constraining more productive consumption and investment choices.
Therein lies a business opportunity for enlightened banks, lenders and crowdfunders, to recognize the phenomenal growth opportunity in student loan refinance. That is what investing with impact is all about; generating sustainable positive social impact alongside financial returns.
Jeremy K. Balkin is author of the new book, Investing with Impact: Why Finance is a Force for Good.