In August, the Biden administration announced a new student loan forgiveness program for federal loan borrowers. Under the new program, borrowers with certain income restrictions could qualify for up to $10,000 of loan forgiveness, and borrowers with Pell Grants could qualify for up to $20,000 of forgiveness. Although seeing your balance drop by $10,000 to $20,000 can be a huge relief, you may still owe a significant amount of money. According to Experian, the average student loan balance was $39,487 in 2021. If you had that amount of debt and qualified for the maximum of $20,000 in forgiveness, you’d still have to repay the remaining $19,487 — plus interest. Because most borrowers will still have a balance after student loan forgiveness, refinance options can help them manage their debt. However, student loan refinancing isn’t right for everyone, so it’s important to understand the pros and cons.
Who Is Eligible for Student Loan Forgiveness?
Under the new program, borrowers are eligible for student loan forgiveness if they meet the following criteria:
- Income: Borrowers can qualify for the program if they earn less than $125,000 per year ($250,000 for households).
- Loans: To qualify for loan forgiveness, borrowers must have outstanding federal student loans. The following loan types qualify:
- Federal loans issued under the Direct loan program
- Federal Family Education Loan (FFEL) loans owned by the U.S. Department of Education
- Federal Perkins loans owned by the U.S. Department of Education
Currently, FFEL and Perkins loans that aren’t in default and are privately owned are not eligible for refinancing. The U.S. Department of Education said it’s actively talking to private FFEL and Perkins lenders to find out if forgiveness will be possible for currently ineligible borrowers. However, borrowers that don’t qualify can become eligible by consolidating their loans with a federal Direct Consolidation Loan by December 31, 2023. Tip: You can sign up for notifications to find out when the loan forgiveness application is available and other news by signing up with the U.S. Department of Education.
Is There Student Loan Forgiveness for Refinanced Loans?
Many borrowers may have taken advantage of student loan refinancing to lower their interest rates or monthly payments. If you’re one of those borrowers, you may be wondering if you’re eligible for student loan forgiveness if you refinanced your debt. Unfortunately, student loan forgiveness for refinanced loans isn’t possible. When you refinanced your debt, you transferred the loans to a private lender. Under the new program’s guidelines, private student loans aren’t eligible for loan forgiveness.
When Does It Make Sense to Refinance Student Loan Debt?
Even if you’ll benefit from student loan forgiveness, refinance programs can still be useful. The new loan forgiveness program is a one-time initiative, and it may not be enough to eliminate all of your debt so that student loan refinancing can make sense in the following three situations:
1. You Have Ineligible Loans
Like most college graduates, you likely have several student loans. You may even have a mix of federal and private debt. If that’s the case, you can benefit from the student loan forgiveness program and refinance your private student loans to simplify your payments and potentially lower your interest rates.
2. You Earn Too Much Money to Qualify for Loan Forgiveness
Not everyone will qualify for the new loan forgiveness program. You won’t receive any loan forgiveness if you earn more than $125,000 per year — $250,000 for couples. If you have loans with high interest rates, you may want to consider refinancing to potentially reduce the amount of interest you’ll pay over the life of your loan. However, remember that refinancing will transfer your federal loans to a private lender, so you’ll no longer be eligible for perks like income-driven repayment plans.
3. You Don’t Qualify for Other Forms of Forgiveness
If you have a substantial amount of student loan debt — about 6% if borrowers owe more than $100,000 — the new loan forgiveness program will only eliminate a portion of what you owe. If you aren’t eligible for other loan forgiveness programs, such as Public Service Loan Forgiveness or Teacher Loan Forgiveness, refinancing could be an option to lower your interest rates and pay off your loans faster. Use the student loan refinance calculator to see how refinancing can shorten your repayment time and save money.
Refinancing Your Loans
If you weigh the advantages and disadvantages of refinancing your loans and decide to proceed with student loan refinancing, you can check your eligibility and loan options online with ELFI’s Find My Rate tool.
