Should you refinance or wait for student loan forgiveness?
Almost 44 million borrowers carry federal student debt– a number that is steadily on the rise. In response to the toll this debt is taking on the economy, the Biden administration announced plans in August 2022 to provide broad student loan cancellation of up to $20,000 for many borrowers. Six states quickly filed lawsuits to stop implementation, and the Supreme Court stepped in to review the case.
In June 2023, SCOTUS announced their decision on the case, with the justices split 6/3, opting to block the loan cancellation plan. For the millions of Americans who had already applied for relief, the announcement came with the realization that repayments (suspended due to the pandemic in March 2020) would also begin again soon.
With the Supreme Court announcement and payments beginning again soon, borrowers may wonder what the best course of action may be. Is it a good time to consider refinancing your federal student loans? Would doing so forfeit future loan forgiveness opportunities? And given the latest developments surrounding federal student loan relief, what can borrowers expect next?
What happened to student loan forgiveness?
For nearly a year, borrowers have held their collective breath awaiting a decision on broad-reaching student loan forgiveness of $10,000 to $20,000. Now that the court has blocked this particular approach, the Biden administration has announced an updated approach for providing nationwide debt relief and support for student borrowers.
How likely is student loan forgiveness?
The U.S. Department of Education has announced steps toward opening an alternative path for loan relief via the Higher Education Act of 1965, with related rulemaking sessions to take place this fall.
In the meantime, other student loan forgiveness programs have been under review, with significant changes made in particular to Public Service Loan Forgiveness (PSLF) to benefit more borrowers. Some borrowers may be eligible for forgiveness under an existing plan.
The new repayment plan
Following the Supreme Court decision, the Biden administration announced a new repayment plan, the Saving on a Valuable Education (SAVE) plan. This plan, aimed at offering a lower monthly payment option for borrowers, will be income-based and offer forgiveness after ten years of repayment (previously, income-driven repayment plans offered relief after 25 years of qualifying payments).
Key elements of the SAVE plan include a lower payment threshold (5% of discretionary income, as opposed to 10% with other plans). In addition, borrowers will not be charged with unpaid monthly interest– meaning loan balances will not grow as long as they make payments.
The “on-ramp” to repayment
To ease the transition back to repayment for the most vulnerable borrowers, the Biden administration has announced a forgiving “on-ramp” to run from October 1, 2023, to September 30, 2024. During this time period, missed monthly payments for federal student loans will not be reported to credit bureaus, considered delinquent, placed in default, or sent to collection agencies.
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. But since 2022, the Fed has hiked its interest rate several times and has indicated that, though rates would be left alone at the June 2023 meeting, two more hikes might be in store later this year.
While lenders don’t use the Fed’s interest rate to set their rates for borrowers, the Fed rate influences the benchmark rates that lenders use, including the prime rate and the Secured Overnight Financing Rate.
As of July 2023, refinancing rates among major lenders currently start as low as 4.40 percent fixed and 1.89 percent variable. It’s easy to see why such rates are attractive for borrowers who returned student loans when rates were high. Just a few years back, federal student loans for the 2018-19 school year 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.
As rates start to climb again, many borrowers are choosing to refinance those loans and lock in lower rates before they go up more. Shaving off a few percentage points might not seem like a big deal, but it can save you thousands of dollars in interest charges.
The downsides of refinancing federal student loans
Many federal student loan borrowers may be eyeing those low interest rates, especially as interest will begin accruing on loans again starting September 1, 2023.
However, borrowers with federal student loans have considerations beyond interest rates alone to keep in mind:
Any future forgiveness would only apply to federal loans: If Congress or a federal agency offers further widespread loan forgiveness in the future, only certain federal loans will be eligible.
Refinancing eliminates other forgiveness options: There are existing federal student loan forgiveness avenues 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 more forgiving than private forbearance: When you move your loans from federal to private through refinancing, you lose federal protections, like deferment and the current forbearance period. These protections have been vital to millions of borrowers who have struggled to pay their student loans due to the COVID-19 pandemic and the subsequent inflation issues.
No “on-ramp” repayment: Privately-refinanced loans would be ineligible for the repayment “on-ramp,” meaning that those loans would not be protected from negative credit effects if you experience difficulty making payments during the next year.
The bottom line: Should you wait for student loan forgiveness or refinance?
Ultimately, the next steps for broad-reaching student loan forgiveness remain in the air. Borrowers who stand to save substantially on interest by refinancing their loans may run the numbers and consider doing so.
Think carefully about what you’ll lose if you refinance any federal student loan debt with a private lender since federal loans offer more benefits than private loans. It may only make sense if you know you won’t need the federal loan benefits and refinancing would help you pay off your loans faster or cheaper.
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.
Frequently asked questions
What happened to the Biden administration’s plan to provide up to $20,000 in student debt relief?
This plan, announced in 2022, was blocked by the Supreme Court and is no longer possible. The Biden administration is pursuing alternative paths to student debt relief, but the previously-announced cancellation of $10,000 or $20,000 for borrowers is now off the table.
If I applied for student debt relief and was approved through the Department of Education, will my loans still be canceled?
No. Even if you applied for the debt relief program and your application was approved, the SCOTUS decision has eliminated the possibility of forgiveness or action on your student loans.
If I refinance my student loans, can they still be forgiven?
If your existing student loans are through a private lender, you are not eligible for federal forgiveness programs in the first place. If your student loans are currently held with the Department of Education and you choose to refinance them with a private lender, you will no longer be eligible for federal forgiveness programs.If you believe you’re eligible for one of the existing forgiveness programs, keeping your loans where they are may be best.
