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Should you refinance or wait for student loan forgiveness?

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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 first year of his presidency to enact those proposals.

But while the Biden administration has provided targeted student loan forgiveness by expanding eligibility for programs like Public Service Loan Forgiveness, borrower defense to repayment and total and permanent disability discharge, widespread forgiveness doesn’t appear to be on the table. Because of this, some borrowers may want to start considering refinancing their student loans.

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Broad student loan forgiveness looks unlikely, so refinancing could be a smart move for some borrowers.

What are the current student loan forgiveness proposals?

In April, President Biden instructed legal experts at the U.S. Department of Education and U.S. Department of Justice to review and determine whether executive action alone is enough to forgive student loans on a mass scale. While it was initially suggested that a memo would be prepared within weeks, the results have yet to be released.

But while it’s becoming less likely that the current administration will take action on sweeping forgiveness, Biden’s administration has tackled current programs to increase forgiveness:

  • Public Service Loan Forgiveness: In October 2021, the administration announced changes to Public Service Loan Forgiveness that made 22,000 borrowers immediately eligible for $1.74 billion in forgiveness. This temporary waiver will also make it easier for borrowers to qualify for the program and receive forgiveness.
  • Borrower defense to repayment: The administration has provided $1.5 billion in student loan forgiveness to borrowers who were misled by their educational institutions. Much of the relief was provided for borrowers who had been previously approved but were only given partial relief through the previous administration.
  • Total and permanent disability discharge: In August 2021, the Department of Education announced that more than 323,000 borrowers would receive over $5.8 billion in student loan forgiveness under the total and permanent disability discharge program. This was made possible through a new regulation that allows the Department of Education to provide automatic discharges through the program by determining eligibility with existing data from the Social Security Administration.

Additionally, the American Rescue Plan removed the tax burden of student loan forgiveness through 2025.

How likely is student loan forgiveness?

On a broader scale, student loan forgiveness is looking increasingly unlikely. In addition to the administration’s focus on a targeted approach to student loan forgiveness, it’s also making plans to resume collecting federal student loan payments once the payment moratorium and interest freeze end on May 1, 2022.

What’s more, comments from Richard Cordray, Chief Operating Officer of Federal Student Aid, suggest that widespread forgiveness is off the table.

“Borrowers have been hearing a steady drumbeat about the possibility of loan forgiveness, either wholesale or piecemeal,” said Cordray at a September 2021 Education Finance Conference. “We can expect that many, many borrowers will not be eager to return to repayment when they have been led to believe, or even to hope, that was never going to happen. Getting over that psychological hurdle with millions of Americans may be a much harder job than we know.”

Can I still get student loan forgiveness if I refinance my loan with a private company?

Student loan forgiveness programs are only available for federal student loan borrowers that have loans originated by the Department of Education. This means that if you refinance your federal student loans with a private lender, you won’t qualify for any of the existing loan forgiveness programs or any future ones, either.

Of course, you may still qualify for student loan repayment assistance through your employer. But if you believe that you’re currently eligible for one of the existing forgiveness programs, it may be best to keep your loans where they are.

Why borrowers are refinancing their student loans now

When the coronavirus pandemic hit and the Federal Reserve cut interest rates to near-zero, student loan refinancing interest rates fell to all-time lows. Even two years later, refinancing rates currently start as low as 1.64 variable and 1.99 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 upward of 10 percent.

In the current low-interest environment, many borrowers are choosing to refinance those loans and lock in lower rates. Shaving off a few percentage points might not seem like a big deal, but it can ultimately save you thousands of dollars in interest charges. And if there’s little chance of broad student loan forgiveness on federal student loans, many are taking the savings while they can.

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 May 2022.

However, while refinancing has few downsides if you have private student loans, borrowers with federal student loans have other considerations to keep in mind:

  • Any future forgiveness would only apply to federal loans: Although there’s no guarantee that the Biden administration will offer widespread loan forgiveness, if it does happen, only certain federal loans will be eligible.
  • Refinancing eliminates other forgiveness options: Even if President Biden doesn’t enact popular student loan forgiveness proposals, 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 20 to 25 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 that 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?

For federal borrowers, it’s often best to avoid refinancing even without the prospect of student loan forgiveness looming, since federal loans offer more benefits than private loans. But with no real momentum for widespread student loan forgiveness, it might not make sense to hold off on refinancing if refinancing would help you pay off your loans faster or more cheaply.

Take some time to research your options and think about what benefits you’ll lose that you might want, such as access to income-driven repayment and generous forbearance options. You can use an online student loan refinance calculator to get an idea of the potential savings.

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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