With loan forgiveness possible, should you refinance federal student loans into private loans?

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Student loan debt has reached a boiling point for many Americans, and lawmakers are taking notice. Student loan forgiveness was one of the many college-related items on President Biden’s campaign agenda, and congressional Democrats like Elizabeth Warren have pushed him in the early months of his presidency to enact those proposals. Student loan forgiveness is looking more and more possible, prompting many borrowers to wonder about their options in the meantime. In particular, borrowers may be torn between the potential for student loan forgiveness and the reality of low student loan rates through refinancing.

What are the current student loan forgiveness proposals?

Biden has previously mentioned that Congress should handle alleviating the student loan debt crisis. But he’s already working with his cabinet to explore ways to forgive student loan debt in some form without congressional approval. He has expressed support for a proposal that would cancel $10,000 in federal student loan debt per borrower, a move that would wipe out the entire federal student loan debt of around 15 million borrowers. He also supports revamping Public Service Loan Forgiveness to forgive $10,000 each year for up to five years for eligible borrowers who participate in the program.

Sen. Elizabeth Warren, meanwhile, has urged Biden to increase one-time relief to $50,000 per federal borrower. Under this plan, more than 36 million borrowers could see their federal loans wiped out. Of that, almost 10 million borrowers who are currently delinquent or in default or their student loans would see their loans completely wiped out.

Even though there is a lot of talk, there isn’t a whole lot of action — at least not on a large scale. Biden removed student loan forgiveness from his most recent stimulus plan earlier this year, but he did make smaller moves to forgive the student loans of people with total and permanent disabilities and those who had been scammed by former colleges. The stimulus bill also removed the tax burden of student loan forgiveness through 2025, which many believe sets the stage for a broader student loan forgiveness strategy.

Why borrowers are refinancing their student loans now

When the coronavirus pandemic hit and the Fed cut interest rates, student loan rates fell to all-time lows. Even over a year later, refinancing rates currently start as low as 1.9 percent variable and 2.5 percent fixed.

It’s easy to see why refinancing is attractive for borrowers who took out student loans back when rates were high. Federal student loans for the 2018-19 school year, just a few years back, had rates of 5.05 percent for undergraduates and 6.6 percent for graduates. If you had poor credit when you took out loans, your private student loan rates could be even higher, even into the double digits.

In the current low-interest environment, many borrowers are choosing to refinance those loans and lock in rates below 5 percent. Shaving off a few percentage points might not seem like a big deal, but it can ultimately save you hundreds or thousands of dollars on your loan.

The downsides of refinancing federal student loans

Many federal student loan borrowers may be eyeing those low interest rates, especially as the administrative forbearance period nears its end in September. However, while refinancing has few downsides if you have private student loans, borrowers with federal student loans have other considerations to keep in mind:

  • Biden’s forgiveness would only apply to federal loans. The student loan forgiveness proposals outlined above are far from guaranteed, but some relief is possible — and if it happens, it will affect only borrowers with federal student loans. If you refinance your federal student loans into private ones, you’ll no longer be eligible for any future loan relief by the federal government.
  • Refinancing eliminates other forgiveness options. Even if Biden’s proposals don’t pass, there are existing avenues for federal student loan forgiveness that you’ll lose if you refinance. For instance, you may qualify for an income-driven repayment plan or Public Service Loan Forgiveness, which forgive your student loan balances after around 20 years or 10 years of payments, respectively.
  • Federal forbearance is usually better than private forbearance. When you move your loans from federal to private through refinancing, you lose your federal protections, like deferment and the current forbearance period. These protections are vital to millions of borrowers who can’t afford to make payments on their student loans due to the COVID-19 crisis. This means if there’s ever another hold again, your refinanced loans wouldn’t be included.

The bottom line: Should you wait for student loan forgiveness or refinance?

While refinancing might be a good idea for some, it’s not right for everyone. Review your options thoroughly to see if it makes sense. For most federal borrowers, it’s typically best to avoid refinancing even without the prospect of student loan forgiveness looming. Federal student loans have more benefits than private loans, and if you have your heart set on student loan forgiveness, you may be able to get it through income-driven repayment or PSLF should Biden’s proposals fail to pass.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Student loans editor