Unless you’ve been avoiding the news, you probably know by now that Biden’s plans to forgive $10,000 to $20,000 in federal student loan debt per borrower did not pan out. While the plan was on shaky ground already, the Supreme Court of the United States made this certain when they ruled Biden did not have the authority to offer this forgiveness at the end of June 2023.
This means that borrowers with federal student loans will need to begin making their payments come October of this year. This also means that interest on federal student loans will begin accruing once again in September after being fixed at 0% since March of 2020.
If you’re someone with federal student loan debt and you’re worried about making payments, you do have some options at your disposal. For example, you could lengthen your repayment plan to score a lower monthly payment, or you could sign up for an income-driven repayment plan. You may also be wondering if now is a good time to refinance your federal student loans.
The answer to this question is a hard “no” for the majority of borrowers, and here’s why.
Why You Shouldn’t Refinance Student Loans Right Now
There are four main reasons why you shouldn’t refinance your student loans right now.
First, you should know that refinancing federal student loans is done with private lenders, and this means you’ll give up any federal protections that were afforded to you. This means that, in the unlikely event the payment pause is extended again or interest rates are locked in at 0% for a longer timeline than they are now, new loans refinanced with a private lender would not qualify.
Also note that refinancing federal student loans with a private lender means you would no longer be eligible for federal income-driven repayment plans that can have you pay as low as $0 per month if your income drops low enough. This includes Biden’s new SAVE plan, which is set to cut borrower’s monthly payments in half compared to other income-driven plans with even more borrowers qualifying for a $0 monthly payment.
According to the Biden administration, borrowers who opt for this plan who don’t qualify for a $0 monthly payment should save at least $1,000 per year in student loan payments. Not only that, but borrowers on the SAVE plan who owe $12,000 or less can have their loan balances forgiven in 10 years instead of 20 years. In the meantime, unpaid interest on the SAVE plan doesn’t accrue, so borrowers who ultimately have their loans forgiven won’t see their loan balances grow while on the plan.
According to a press release from the White House, all student borrowers will be eligible to enroll in the SAVE plan, and enrollment will be available before payments on federal student loans come due again later this year.
Separately, the Biden administration has announced a 12-month “on-ramp” to help troubled borrowers that will last from October 1, 2023 to September 30, 2024. This program aims to help vulnerable borrowers stay on track even if they miss monthly payments. In fact, the press release for this program says those who miss monthly payments during this period “are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.”
If you were to refinance your federal loans now, this means you wouldn’t qualify for the SAVE plan or any other income-driven plan. If you were to run into financial trouble, you also wouldn’t be able to take advantage of the on-ramp period that lets you avoid loan delinquency if you miss federal student loan payments through September 30, 2024.
Third, there are many existing student loan forgiveness programs that apply to borrowers with federal loans. These include programs like Public Service Loan Forgiveness, Teacher Loan Forgiveness, and more. If you refinance your student loans into a private loan, you’ll become ineligible for many of these loan forgiveness programs.
The last reason not to refinance is a long shot but it’s still worth considering. In light of the original student loan forgiveness plan being shut down by the Supreme Court, Biden announced in late June that he would still try to forgive some amount of federal student loan debt through the Higher Education Act of 1965.
No one is sure right now how much federal student loan forgiveness would be offered if this were to work out somehow, or when it would come into play. Considering the Supreme Court ruled that student loan forgiveness was beyond Biden’s authority, it also seems incredibly unlikely to happen and more of a “vote grab” than anything.
Either way, refinancing federal student loans now means you would not qualify for forgiveness through the Higher Education Act of 1965, either. If you think that could actually happen, this is yet another reason to wait.
When It Might Make Sense to Refinance
All these reasons aside, there are always exceptions to consider. If you’re a very high earner who feels strongly they would not qualify for federal student loan forgiveness even if it were to come into play, it can make sense to refinance student loans to get a better deal.
In some cases, it may be possible to get a lower interest rate with private lenders than you might be paying with federal student loans, especially PLUS loans. As an example, College Ave. is currently advertising fixed-rate graduate school loans with rates as low as 4.42%. This compares favorably to rates currently being offered on PLUS loans for parents of undergraduate students and graduate or professional students, which is currently set at 8.05%.
Of course, you’ll want to compare student loan refinancing rates to the rates you’re actually paying on federal student loans and not just what is offered on new federal loans issued right now. Also keep in mind that the lowest rates from private lenders are only offered to individuals with excellent credit, and that some borrowers still may not qualify.
The Bottom Line
At the end of the day, there’s still a lot of uncertainty when it comes to federal student loans and whether forgiveness or other types of help will apply in the coming years. For this reason, it may make more sense to wait on refinancing to see where things go.
No matter what you do, you should consider all the different repayment plans you could choose for federal student loans, including the SAVE plan, before payments resume in October of this year. It’s highly possible you’ll qualify for a lower monthly payment than you were making before with the SAVE plan, but you won’t know for sure unless you check.
According to studentaid.gov, borrowers already enrolled in the REPAYE plan for federal loans will be automatically moved to the SAVE plan. Everyone else can apply or see what their monthly payment would be and enroll in the plan when the application becomes available later this summer.
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