How refinancing your student loans now could affect your access to loan forgiveness in the future
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- If you've been thinking about refinancing your student loans while interest rates are down, you may want to reconsider.
- If you have federal student loans, now is not the time to refinance — your loans will become private, and you'll lose the protections the CARES Act introduced in March, including forbearance and 0% interest rates.
- Plus, President-elect Joe Biden has mentioned student loan forgiveness a few times recently. It's not a sure thing, but if you refinance now and take on a private loan you'll be last in line for forgiveness — if you're eligible at all.
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President-elect Joe Biden has mentioned student loan forgiveness a few times recently. But there is no solid plan yet for forgiveness, nor details about who would be eligible or what would be forgiven.
But with a pandemic bringing a concurrent recession and record low interest rates, refinancing has caught many borrowers' eyes. Is it worth it to refinance now, given all that's currently happening and could happen down the road?
For those who have federal student loans, the answer right now is likely no.
As financial planner John Bovard of Incline Wealth Advisors points out, refinancing would mean leaving the federal student loan system, and it's not worth doing that just yet.
"We're at a wait-and-see standpoint with student loans," says Bovard. "That's why I wouldn't wouldn't necessarily recommend refinancing right now or consolidating right now; it's better to just hold off and see what, if any, help is on the way."
Refinancing a federal loan means switching to a private loan, and that means losing forbearance and repayment options
Refinancing a student loan essentially pays off your federal student loan or other private loan with a new, private student loan, with different terms or a lower interest rate.
After refinancing, federal student loans become private student loans, and ineligible for protections through the federal student loan program. This includes things like income-driven repayment plans, which are meant to help reduce or eliminate student loan payments for those with low or no income.
Refinancing also eliminates the automatic protections put in place by the CARES Act, which lowered interest rates to 0% and extended forbearance until January 2021, barring any new legislation. Private lenders have their own rules and don't offer the same types of help as the federal government.
There's no information on forgiveness, but the protections available now make it worth waiting to refinance
There's no way to know whether the Biden administration will ultimately offer student loan forgiveness (or how much will be forgiven), which might make it hard to plan for the future. But keeping your federal student loans could help you take advantage of the protections and forbearance available now.
Until January, no payments are due on federal student loans, and no interest is accumulating under the CARES Act. Keeping those protections in place instead of refinancing allows for another month without payments.
If payments resume in 2021 and your income is low, an income-driven repayment plan could help you stay on top of your payments. Income-driven repayment plans reduce payments to a percentage of your income, and some loans can be forgiven altogether after 20 years of payments (including these months of pandemic forbearance).
While these options may not be as beneficial or as freeing as total student loan forgiveness, they're currently available to anyone with federal student loans. While the CARES Act will expire, income-driven repayment plans are available through the federal government indefinitely. Neither will be available to anyone who refinances, however.
Refinancing in the future isn't necessarily a bad call — indeed, securing a lower interest rate may make your financial life a lot easier — but the current federal student loan programs and protections make refinancing worth waiting for.
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