To pay down the $70,000 he and his parents borrowed to cover five years at Towson University, Matthew O’Connor keeps his expenses at a minimum.
The science teacher at Watkins Mill High School in Gaithersburg, Md., rents an $800-a-month basement apartment and drives the same 2006 Hyundai Elantra he’s had since college. He owes about $20,000 more than he makes in a year. Although the federal student loans he took out carry a manageable, low rate, most of his debt comes from loans his parents took out that cost him nearly 8 percent in interest.
And as O’Connor pursues a graduate degree — a requirement for all public school teachers in Maryland — there’s a good chance he will have to borrow again.
“At this rate, I can’t imagine a foreseeable future where I can afford a home in Montgomery County,” he said.
O’Connor is exactly whom lawmakers had in mind when they developed legislation that would allow Montgomery to establish a loan authority, a move that would give the county the ability to leverage its municipal borrowing power to extend rock-bottom rates to its residents. It could be a way for the wealthy county to attract young, college-educated workers and entrepreneurs.
“If we’re able to say, ‘If you come to Montgomery County . . . we’ll help you refinance your student loans and lower your cost of living,’ that’s a very powerful, very attractive incentive,” said Montgomery County Council member Tom Hucker (D-Eastern County). “It could help retain the graduates of our high schools that we’ve already invested in. We want them to stay here, start families and businesses, own houses.”
If the bill succeeds in the next legislative session, Montgomery would join a growing list of states stepping into the student loan market to ease the debt burden on residents.
Minnesota, Maine, North Dakota, California and Connecticut have passed legislation that allows them to refinance student loans, while politicians in Virginia and Wisconsin are pressing for the same. Proponents say student debt has become a significant economic barrier, keeping people from full participation in the local economy.
States are in many cases reviving or using existing student loan authorities created decades ago to lend money and guarantee federally insured loans. These agencies can finance loans from the proceeds of tax-exempt bonds but can only use that tax-free revenue to lower the interest rate on loans they originated.
Guidance issued by the Treasury Department in November, however, said state agencies can now use tax-exempt bonds to refinance student loans for anyone who lives or attended college in that state, regardless of the original lender.
“It’s a really big deal, because when you’re using tax-exempt bond financing you can usually get a lower interest rate,” said Debra Chromy, president of the Education Finance Council, which represents nonprofit and state student loan agencies. “Since the guidance came out, almost every single one of our member organizations are working to pull together a program.”
There are few options for lowering the interest rate on student loans. Consolidating federal loans can bring down the rate but only a smidge, because the interest is calculated by taking an average of those rates. Although there is bipartisan support for the government to refinance federal loans, legislation to clear a path failed to garner enough votes in Congress.
At least a dozen lenders will consolidate federal and private loans into one new loan at a lower rate, typically in exchange for a fee. There also are start-ups such as Social Finance and CommonBond that refinance private and federal loans, but their target audience tends to have advanced degrees, hefty paychecks and stellar credit.
State lawmakers say they worry that middle-class and working-class families don’t have the same opportunities. But they believe that if municipalities jump into the mix, a broader variety of people could benefit from lower rates, especially those who carry private education loans.
Refinancing federal student loans, even through state authorities, could mean giving up consumer benefits, including income-driven repayment plans and public-service loan forgiveness.
There are states that offer their version of the federal government’s plans that cap monthly loan payments to a percentage of income yet nothing quite as generous as the forgiveness option.
“Consumers looking at these programs need to evaluate what they might be giving up,” Chromy said. “And if the interest rate differential is not that different, if you’re looking at 4.9 percent versus a 5.2 percent, it may not be worth it.”
As a public school teacher, O’Connor would be eligible for Public Service Loan Forgiveness, a program that wipes away debt for people in the public sector after 10 years of repayment. And if he stays at his school, which serves low-income students, for two more years, he would qualify to have $17,500 of his federal student loans forgiven.
All of those benefits would be lost if he were to refinance his debt through the proposed authority.
O’Connor said he would apply only to lower the interest rate on his parent loans, which are ineligible for either of the forgiveness programs.
“As much as my parents would love to help, I’m in charge of paying back all of the loans that were taken out,” he said.
Originally from New York, O’Connor paid out-of-state tuition to attend Towson. By the time he graduated with a degree in biological science in 2013, tuition and fees hit $20,000.
He enrolled in the Obama administration’s Pay as You Earn plan, which caps borrowers’ monthly loan payments at 10 percent of their income and forgives the debt after 20 years of payment. That lowered the payments on his student loans by $100 but didn’t help with the parent loan payments, which don’t qualify for the plan.
Tom Israel, executive director of the Montgomery County Education Association, surveyed members of the teachers union in the spring and found that half of the 800 who responded had more than $40,000 in student debt. A third said their monthly payments were $400 or more.
“It’s a huge burden on teachers,” Israel said. “They can’t afford to even live in the county where they teach because they’re laying out so much money to pay off their loans.”
He got the attention of Maryland House Majority Leader Anne R. Kaiser (D-Montgomery), who is proposing legislation to let the county establish a loan authority.
The County Council discussed the possibility during a state legislative hearing in Rockville two weeks ago. It would ultimately be up to the council to appoint a five-member board to run the agency if Kaiser’s legislation succeeds in Annapolis.
Although the idea was well received at the hearing, there was concern that the proposal is short on details and that the county could be putting taxpayer money at risk.
“Montgomery County should not be a loan-shark county,” testified Jerry Garson, of the Montgomery County Civic Federation. “Why we are setting up an authority that will add millions of dollars in administration costs . . . when we cannot maintain our current roads . . . and we keep reducing our current services?”
Kaiser said it’s difficult to estimate the initial cost of launching the authority because the full scope of the program is still being determined.
“It’s still very early” Kaiser said. “We have to ensure that we’re protecting the customers and we’re giving them a better rate than they’d get from the federal government.”
Kaiser said she hopes to flesh out the terms during the coming legislative session. In the meantime, she has been studying the refinance program established by the Rhode Island Student Loan Authority (RISLA).
RISLA kicked off its program a little more than a year ago. Because the authority was using bond financing to lend to college students in the state, it had the infrastructure in place to refinance loans and got the program running quickly, said Charles Kelley, executive director of the authority.
Since August 2014, RISLA has refinanced $13.6 million in student loans for 349 people. The authority offers only fixed rates on loans that can be repaid over five, 10 or 15 years. People with good credit or with a co-signer can qualify for rates as low as 4.25 percent.
“We’re having a hard time keeping up with the demand,” he said, noting that the greatest interest is coming from people with parent loans.
Kelley said people are doing a good job of keeping up with their payments; the cumulative default rate for all of the loans the authority originated or refinanced is just above 2 percent.
After expenses, any remaining proceeds from Rhode Island’s program are used for outreach initiatives to educate students about loans and grants. Kelley advises any authority interested in its own refinancing program to counsel borrowers on their options, as refinancing may not be the best solution.