Warning: Now Is Probably the Worst Time to Refinance Your Student Loan
Disclaimer: The author is not a certified financial advisor. Please check with one before making any financial decisions.
There has been a flurry of ads lately by banks offering to refinance student loans at lower rates than those offered by federal government programs, but this is probably not something you want to consider, at least not yet.
If you borrowed money to pay for your education, you may have heard that the U.S. Congress has been considering forgiving some or all of your student loan debt.
The idea, promoted by progressive senators like Elizabeth Warren and Bernie Sanders, gained traction during the 2020 presidential race. Members of Congress have recently made several (mostly unsuccessful) attempts to pass legislation to lessen student borrowers' burden.
Only one attempt last year made it successfully past both the House and Senate and was signed into law, but that was then, this is now. The new Congress and the Biden Administration are much more likely to give student borrowers an even bigger break. Given the current situation, you might be wise to wait to refinance.
Coronavirus Aid plan pauses student loan payments and interest
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (H.R. 748). Became Public Law 116–136 on 3/27/2020. The legislation provides a student loan payment pause and interest waiver, and a halt on collections on loan defaults, through September 30, 2020, on loans held by the U.S. Department of Education.
The former administration extended the pause to January 31, 2021. On January 20th, President Biden signed an executive order, further extending the pause to “at least” September 30, 2021. But this effort, although welcome, is just a band-aid. What many people need is an escape from debt, not just a break from payments. How much student debt relief can you expect?
While President Biden supports canceling $10,000 in student loan debt per person, some, like Senator Warren, argue that the figure should be much higher.
The devil will be in the details
“Regardless, any final proposal to cancel student debt will likely have limits, restrictions, and eligibility criteria, and some borrowers will inevitably be left out.” — Adam S. Minsky in Forbes Magazine
Whether or not you’ll be singing “Happy Days Are Here Again” or just singing the blues once Congress and the president reach an agreement over the student loan forgiveness issue may depend on several factors. These might include some or all of the following:
- What kind of loan you have (federal or private)
- How much you owe
- How much you currently earn
- Whether or not you are in default
- What kind of degree you earned and how long you’ve worked in that field
(Teachers, for instance, are already eligible for loan forgiveness in certain circumstances.)
Attorney Adam S. Minsky, a senior contributor to Forbes Magazine, cautions borrowers, “Regardless, any final proposal to cancel student debt will likely have limits, restrictions, and eligibility criteria, and some borrowers will inevitably be left out.”
The good news is that even if the plan is capped at $10,000 per borrower, many people will be delighted. According to the Department of Education’s most recent data, about 42 million Americans currently hold some federal student debt. Approximately one-third of them owe less than $10,000.
Another one in five borrowers owe under $20,000. So, even if the plan only offers $10,000 in loan forgiveness, a good percentage of borrowers will have their loans wiped out completely, and about half will enjoy at least a 50% reduction.
Those figures don’t take into account people who took out loans outside the federal system. The impact on those borrowers is less certain.
The big takeaway here is…
Federal student loan holders may want to take a wait-and-see attitude before swapping them for lower-interest private loans. There’s every reason to believe that help is on the way.
©2021, Denise Shelton. All rights reserved.