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Refinancing your federal student loans is an option that can reduce your interest rate, but in most cases it’s not the best choice.
For one thing, you’ll lose many protections offered by the federal government. Sonia Lewis, a student loan expert who has helped over 20,000 clients navigate their federal student loans, says refinancing your student loans will make you ineligible for protections like:
On top of that, you’ll lose access to the student-loan forgiveness that President Biden announced on August 24: $10,000 in federal student loans per borrower, $20,000 if you received a Pell Grant.
To qualify for Biden’s forgiveness plan, you must meet the income requirements of $125,000 or less for individuals, and $250,000 or less for married couples who file their taxes jointly — and you must have loans owned by the federal government.
Generally, only loans held by the federal government are eligible for Biden’s forgiveness plan. Here are the federal loan types eligible for student-loan forgiveness:
Another way to check if your loans are held by the US government is to check your student loan servicer. Here’s a complete list of federal student loan servicers:
If your loans are managed by servicers not listed above, they are privately held. If you refinance your student loans with a private lender, your loans will no longer be held by the federal government, and, therefore, will become ineligible for forgiveness.
If you refinance your student loans, you won’t be eligible for Biden’s forgiveness plan of up to $20,000. You’ll also lose the following protections:
The main reason a borrower might refinance their federal loans with a private lender is a lower interest rate (though private lenders don’t always offer lower rates).
Now that the pandemic pause is ending, Lewis predicts that companies will begin offering sign-up bonuses to lure federal borrowers that lower the principal balance of your loans, as well as competitive interest rates based on your credit score.
Generally, a lower principal balance and lower interest rates can help you pay off your student loans faster, but not necessarily (for example, if Biden’s forgiveness plan wipes out most or all of your debt).
Lewis says, “I wish I could wear a sign on my forehead that says, ‘Do not leave your loan lender!'” The long-term benefits of student-loan forgiveness and income-driven repayment plans outweigh the short-term benefits of refinancing with a private lender.
Unfortunately, loans that have already been refinanced with a private lender are no longer eligible for student-loan forgiveness.
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