Without action from Congress or President Trump, more than 37 million borrowers will be required to resume federal student loan payments on January 1, 2021. With payments resuming and interest rates at record lows, some borrowers may be tempted to refinance their student loans as a way to lower their payments. If you are lured, please wait. The slight benefit of refinancing now pales in comparison to what you can lose. Depending on which proposal Biden accepts, refinancing could cost you as much as $50,000 now.
Cares Act student loan benefits are ending
The Cares Act, signed into law in March, contained sweeping provisions for federal student loan borrowers, including the suspension of interest, payments and collections on student loans through September 2020. President Trump extended the suspension through an executive order through January 1, 2021. With less than one With a month to go until the suspension ends, and with Trump’s attention elsewhere, it’s unknown if another extension will come into play before President-elect Biden’s inauguration, let alone the start of the new year. As a result, millions of borrowers could soon be forced to resume payments as coronavirus cases continue to scour the US and the labor market shows signs of weakening.
Some individuals may be lured by extremely low interest rates offered by private companies like CommonBond and Earnest. These companies currently offer student loan refinancing at interest rates as low as 1.99 percent. In general, a refinance can save borrowers thousands of dollars in interest, but it also requires relinquishing certain protections that federal student loans offer.
Protecting federal student loans is invaluable right now
Right now, these safeguards are just too valuable to give up. Notably, any action Joe Biden and Congress take on student loans in early 2021 may also apply only to federal borrowers. It would be a colossal mistake to relinquish option value in order to forgive or cancel some or all of your student loans just to receive a lower interest rate.
For precedent, one need only look back to the Cares Act, enacted earlier this year. While it relieved millions of student loan borrowers, the provisions only applied to those borrowers who had federal student loans owned by the Department of Education. As Senators Elizabeth Warren and Sherrod Brown noted, the CARES Act omitted over 7 million student borrowers who had private loans. Illinois Gov. JB Pritzker added that those repaying loans, both private and nongovernmental, “are people who have been impacted by the financial turmoil of this pandemic just as much as their peers who are covered by the CARES Act.” Any extension the moratorium on student loans payments and interest would most likely continue to apply only to those with federal loans.
Ten states stepped in and negotiated an agreement with student loan servicers to provide much-needed protection to private student borrowers. However, the relief is not as strong as it is for federal student loan borrowers. While federal borrowers received no payments and interest for nearly nine months, private borrowers were entitled to at least 90 days of forbearance and a stay of collection actions. Remarkably, most private student loan companies have not been fortunate enough to have interest on their student loans suspended.
When you refinance your student loan, the company you are refinancing with pays off your existing federal loan, giving you a new loan and new terms. Yes, your interest rate will be lower, but you won’t have the same protections or repayment options as you have with a federal loan. This is especially important given the excitement surrounding student loan debt forgiveness or cancellation.
Senators Elizabeth Warren and Chuck Schumer have called on President-elect Biden to forgive the first $50,000 of state student loan debt per borrower. Additionally, Biden’s own campaign proposals included cutting at least $10,000 of federal loans. “It should be done immediately,” Biden said last week of his loan forgiveness plan.
What do these proposals have in common? At least according to the current status, they only apply to federal student loans.
Therefore, if you refinance now, you may miss out on student loan forgiveness or additional payment and interest deferrals. For example, what if you refinanced in December only to see Warren and Schumer’s $50,000 federal loan-only forgiveness proposal enacted into law? You will have made a very costly mistake.
Don’t risk losing a loan waiver or termination just to lock in a low interest rate right now. Instead, wait until Biden is privy to processing student loans, which is expected at the start of his presidency. If your income is tight or you are currently unemployed, you should take advantage of federal protection options such as unemployment benefits.
It could save you tens of thousands of dollars.