Four reasons not to refinance your federal student loans in 2021
With interest rates at historically low levels, refinancing federal student loans can be an attractive option for millions of student loan borrowers. But refinancing your student loans this year comes with significant risk, and borrowers who do so may regret their decision.
Interest rates on some federal student loans, such as some Graduate PLUS loans, can exceed 7% or even 8%. Since there is no way to permanently reduce federal student loan interest rates in the absence of congressional legislation, the only way to get a different interest rate would be to refinance the loan. through a private lender. In general, private student loans have fewer repayment options, limited access (if any) to generous loan programs and benefits, and tighter consumer protections compared to federal student loans.
Once you have refinanced a federal student loan to a private student loan, you cannot convert it back to a federal loan. Borrowers should therefore be fully aware of what they can give up. And there are a lot of things borrowers can give up this year. Here is a preview.
Biden student loan forgiveness
Student loan borrower advocates, civil rights groups and progressive lawmakers have pressured President Biden to write off student loan debt using executive action. Although Biden expressed skepticism about his authority to do so, he asked legal staff at the US Department of Education and the Department of Justice to conduct a formal legal review of potential authorities that could serve as the basis for the use of executive measures to adopt broad student loan forgiveness. This review is ongoing.
While it’s too early to know whether or not Biden will adopt a broad student loan forgiveness, such action would likely be limited to federal student loans only. This is because the legal authorities that would be used to write off student debt – specifically, the Higher Education Act – only govern federal student loans. By refinancing federal student loans into a private loan, borrowers would likely rule out any possibility of canceling some of their student debt through executive action by Biden.
Student loan interest and payment freeze
Currently, payments on most federal student loans are on hold and interest on most federal loans is at 0% under the CARES Act, which was passed in response to the Covid-19 pandemic. President Biden extended this relief until September 30, 2021. While repayment is currently set to resume in October, the administration recently confirmed that there is a possibility it could be extended further.
It’s hard to beat a 0% interest rate. As interest rates are zero and payments suspended, federal student loan borrowers may divert their cash resources to other priorities, such as paying off other debt or replenishing their cash flow. emergency. Alternatively, borrowers who choose to voluntarily make payments on their student loans during the suspension period can repay their balances more aggressively, since no interest accumulates. By refinancing your federal student loans now, you could prematurely cut yourself off from these benefits, which are not available with private student loans. And given that we don’t know what President Biden can do, if anything, regarding the student loan cancellation, there is no cost to wait while interest rates stay at 0%.
Review of income-tested repayment and forgiveness of public service loans
The Biden administration recently announced that it would conduct a regulatory review of major federal student loan programs, including income-based repayment plans and civil service loan forgiveness. These programs are only available for federal student loans.
While it is too early to know what the review of these programs would look like – and it may be a year or more before concrete details are available – it is possible that these programs can be expanded and improved. so that more borrowers can benefit from it. For example, during his presidential campaign, Biden proposed a dramatic reduction in payments for borrowers on income-based repayment plans; this could change the math for borrowers who do not currently have a viable or affordable monthly payment under the plans currently available. By refinancing, you could lose access to these programs.
Loss of other consumer protections
In general, federal student loans offer stronger consumer protections and hardship options than private student loans. Federal student loans have a statutory death and disability release program for borrowers who are no longer able to maintain substantial and gainful employment due to a health problem; generous deferral and forbearance options during times of financial hardship; income-based repayment plans for periods of reduced income; and the ability to reverse the fault if something falls between the cracks. In most cases, private student loans do not have these protections, and while similar protections are offered, they may not be as strong as the federal version of student loans, which are generally based on law. Some of these programs, such as the Disability Release Program, will also come under similar scrutiny under the Biden administration, along with income-based repayment and forgiveness of civil service loans. This could lead to potential improvements.
By refinancing federal loans with a private loan, borrowers would permanently remove these protections. While you may never need to access these programs, unwanted or unexpected events do happen, and it is essential to be aware of what you can give up.
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