President Joe Biden’s plan for student loan forgiveness, announced Aug. 24, could reduce the loan balances of millions of people by up to $20,000. But the forgiveness only applies to federally held loans. For borrowers who previously refinanced their federal loans in a private loan, forgiveness is likely out of the question, according to loan experts.
Robert Farrington, CEO of The College Investor, says that in layman’s terms, when you refinance your student loan, you’re replacing your federal loan with a private loan. “Private loans are owned by banks and lenders, and the government has no control over the terms and conditions of the loan,” he says. “Programs like loan forgiveness are only available for loans the government owns.”
Why do borrowers refinance their loans?
Ironically, while borrowers who refinanced their loans are now missing out on loan forgiveness, many did so in the first place to ease financial stress.
Refinancing federal student loans can be an attractive option for borrowers experiencing financial duress from trying to pay off their debt. It allows borrowers to combine their monthly payments into one new monthly account with just one lender, shorten or extend the term of their loan and, often most importantly, secure a lower interest rate than the government offers.
The most common reason to refinance student loans is to save money, says financial aid expert Mark Kantrowitz. “If you borrowed your federal student loans a few years ago, interest rates were much higher than they are now,” he says. “Even with The Federal Reserve raises interest rates [this year]interest rates on private student loans are still lower than federal loan rates were a few years ago.”
Federal student loan borrowers may have chosen to refinance through a private lender such as a bank, credit union or online lender.
Activists hold signs for student debt cancellation as they gather at a rally outside the White House in Washington, on August 25, 2022.
Stephanie Reynolds—AFP/Getty Images
What’s the catch with refinancing?
When borrowers decide to refinance their student loans through a private lender, they lose any federal loan protections they previously had, Farrington says. These protections include deferment or forbearance options, income-based repayment plans, and loan forgiveness. Borrowers who refinanced their loans before the pandemic, for example, were not eligible to take advantage of the current federal student loan payment freeze and 0% federal interest rate.
Farrington says that while many refinance lenders put a disclaimer on their site highlighting the federal loan pause, they also continue to advertise and promote refinancing during the pandemic.
As noted by the Rockefeller Institute of Government, the public policy research arm of the State University of New York, in 2019 Blog Postfor borrowers can easily be lured by aggressive advertising campaigns for refinancing that obscure the realities of the arrangement.
“These are not well-intentioned services, but profitable ventures for these companies, and their offers may not always be in the best interest of student loan borrowers,” the Institute wrote.
Now, those who chose to refinance won’t qualify for Biden’s widespread repeal.
“Too many federal student loan borrowers get hung up on their interest rate and dismiss the value of all federal options,” Farrington says.
What relief options are there for private borrowers?
There are no general loan forgiveness options for private borrowers.
Some private lenders, however, offer their own protections — though they’re usually not as extensive as those available to federal loan borrowers. Kantrowitz says private loan borrowers looking for relief should start by contacting their lender and asking about their options.
One protection that may still be available to borrowers of private loans is a short-term forbearance or suspension of their repayment obligation. “Generally speaking, they are offered in two- to three-month increments, with a maximum total of one year,” says Kantrowitz.
Borrowers of private loans may also have the option of partial forbearance, which would allow them to stop payments on the principal of the loan while paying off the new interest that accrues. “The downside is you’re still making a payment,” says Kantrowitz. “However, the advantage is that it keeps the loan from growing.”
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