Should you refinance or wait for your student loan forgiveness?
Student loan debt has reached a boiling point for many Americans, and lawmakers are taking note. Cancellation of student emergency loans was one of many college-related items on President Biden’s campaign agenda, and Congressional Democrats like Elizabeth Warren pushed it in the early months of her presidency to adopt these proposals. Student loan cancellation seems more and more possible, prompting many borrowers to question their options in the meantime. In particular, borrowers may be torn between the possibility of a student loan forgiveness and the reality of low student loan rates through refinancing.
What are the current student loan forgiveness proposals?
Biden has already mentioned that Congress should deal with easing the student loan debt crisis. But he’s already working with his firm to explore ways to cancel student loan debt in one form or another without the approval of Congress. He expressed support for a proposal that would write off $ 10,000 in federal student loan debt per borrower, a move that would wipe out all of the federal student loan debt by approximately 15 million borrowers. It also supports the overhaul of the civil service loan forgiveness to provide $ 10,000 annually for up to five years to eligible borrowers who participate in the program.
Senator Elizabeth Warren, meanwhile, urged Biden to increase one-time relief for $ 50,000 per federal borrower. Under this plan, more than 36 million borrowers could see their federal loans canceled. Of that number, nearly 10 million borrowers currently in arrears or in default on their student loans would see their loans completely wiped out.
Even though there is a lot of talk, there isn’t a lot of action, at least not on a large scale. Biden removed student loan cancellation from his most recent stimulus package earlier this year, but he has taken more modest steps to cancel student loans for people with total and permanent disabilities and those who had been ripped off by old colleges. The stimulus bill also reduce the tax burden of canceling student loans until 2025, which many believe paves the way for a broader student loan cancellation 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 rate currently start as low as 1.9% variable and 2.5% fixed.
It’s easy to see why refinancing is attractive to borrowers who took out student loans when rates were high. Federal student loans for the 2018-19 school year just a few years ago had rates of 5.05% for undergraduates and 6.6% for graduates. If you had poor credit when you took out the loans, your private student loan rates could be even higher, even in the double digits.
In today’s environment of low interest rates, many borrowers choose to refinance these loans and lock in rates below 5%. Reducing a few percentage points may not seem like a big deal, but it can ultimately save you hundreds or thousands of dollars on your loan.
The Cons of Refinancing Federal Student Loans
Many federal student loan borrowers may be considering these low interest rates, especially since the administrative forbearance period comes to an end in september. However, while refinancing has few drawbacks if you have private student loans, borrowers with federal student loans have other considerations to keep in mind:
- Biden’s rebate would only apply to federal loans. The student loan cancellation proposals outlined above are far from guaranteed, but some relief is possible – and if it does, it will only affect borrowers on federal student loans. If you refinance your federal student loans to private loans, you will no longer be eligible for any future loan relief from the federal government.
- Refinancing eliminates other forgiveness options. Even if Biden’s proposals do not pass, there are federal student loan cancellation opportunities that you will lose if you refinance. For example, you might be eligible for a income based repayment plan Where Public service loan remission, which will write off your student loan balance after about 20 or 10 years of payments, respectively.
- Federal forbearance is generally better than private forbearance. When you transfer your loans from the federal to the private through refinancing, you lose your federal protections, such as the deferral and the current forbearance period. These protections are vital for millions of borrowers who cannot afford to repay their student loans due to the COVID-19 crisis. This means that if there is another holdback, your refinanced loans will not be included.
The bottom line: should you wait for student loan cancellation or refinancing?
While refinancing may be a good idea for some, it is not for everyone. Consider your options carefully to see if this makes sense. For most federal borrowers, it’s generally best to avoid refinancing, even without the prospect of a looming student loan forgiveness. Federal student loans have more advantages than private loans, and if you are keen on canceling student loans, you may be able to get it through income-tested or PSLF repayment if Biden’s proposals fail.