President Joe Biden’s student loan forgiveness plan, announced August 24, could decrease the loan balances of millions of people by up to $20,000. However, the forgiveness applies only to federally owned loans. According to experts, for borrowers who have refinanced federal loans into private loans, forgiveness may not be possible.
Robert Farrington, CEO of The College Investor, says that, in layman’s terms, when you refinance your student loan, you replace your federal loan with a private loan. “Private loans are owned by banks and lenders, and the government has no control over the terms and conditions of the loan,” he says. “Programs like loan forgiveness are only available for loans the government owns.”
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Why would borrowers want to refinance loans?
It is ironic that borrowers who refinance their loans miss out on loan forgiveness. Many did it in the first instance to ease money stress.
Federal student loan refinance can offer borrowers who are in financial distress from having to pay back their debt. The loan allows borrowers to merge their monthly payments in one bill, with one lender. They can also shorten, lengthen, or extend their loan repayment terms, as well as secure a lower rate of interest than the government.
Mark Kantrowitz, financial aid expert says the main reason students refinance their student loans is to reduce costs. “If you borrowed your federal student loans several years ago, the interest rates were much higher than they are now,” he says. “Even with the Federal Reserve raising interest rates [this year], interest rates on private student loans are still lower than the interest rates on federal loans were several years ago.”
Refinance through a private lender, such as a bank or credit union, may be an option for Federal Student Loan borrowers.
Students protestors are holding cancel student debt signs while they gather in front the White House in Washington D.C. Aug. 25, 2022.
Stefani Reynolds—AFP/Getty Images
What’s the catch with refinancing?
Farrington states that federal student loan protections were lost when borrowers refinanced their loans with a private lender. They include income-driven repayment plans, loan forgiveness, deferment and forbearance options, as well as loan forgiveness. Borrowers who refinanced their loans prior to the pandemic, for example, weren’t eligible to take advantage of the current pause on federal student loan payments and federal interest rate of 0%.
Farrington says that while many refinancing lenders put disclaimers on their site highlighting the federal loan pause, they’ve also continued to advertise and promote refinancing throughout the pandemic.
The Rockefeller Institute of Government (the public policy research arm of State University of New York) noted in a blog post that aggressive refinance ad campaigns can make it easy for borrowers not to see the reality of the deal.
“These are not benevolent services, but profit-making ventures for these companies, and their offers may not always be in the best interest of student loan borrowers,” the Institute wrote.
Now, those who chose to refinance won’t qualify for Biden’s widespread cancellation.
“Too many federal student loan borrowers get hung up on their interest rate, and dismiss the value of all the federal options,” Farrington says.
Are there any relief options for private loan borrowers who are in default?
Private loan borrowers do not have the option of a loan cancellation.
However, some private lenders do offer their own protections—though they’re typically not as extensive as those available to federal loan borrowers. Kantrowitz suggests that private loan borrowers who need relief contact their loan lender to inquire about the options.
A short-term waiver, which suspends borrowers’ repayment obligations, is one protection available for private loan borrowers. “Generally speaking, these are offered in two- to three-month increments, with a maximum total of a year,” Kantrowitz says.
A partial forbearance is an option that private loan borrowers have. This would permit them to stop paying the principal amount of the loan and still pay the interest. “The downside is you’re still making a payment,” Kantrowitz says. “But the advantage is that it keeps the loan from growing larger.”
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