Certain student-loan companies are providing borrowers with lower payments prior to October. However, switching to these options may result in the loss of various debt relief programs.

Certain student-loan companies are providing borrowers with lower payments prior to October. However, switching to these options may result in the loss of various debt relief programs.

student-loan It’s a precarious time for millions of student-loan borrowers. After three years without being required to make payments on their federal student loans, they will soon start receiving their first monthly bills before they come due in October. Interest will start to accrue on their balances again in September, and on top of it all, they won’t be easing into this restart with any relief — the Supreme Court struck down President Joe Biden’s plan to cancel up to $20,000 in student debt for federal borrowers at the end of June.

Amidst this confusing and anxiety-filled time, advertisements from student-loan companies are adding an extra layer of confusion. These companies, which manage private loans, have started reaching out to federal borrowers, encouraging them to refinance their federal debt for a better deal on payments. However, what borrowers may not realize is that refinancing could come with a cost—the loss of federal benefits.

SoFi, one such student-loan refinancing company, sent letters to borrowers last month with a header that read, “Federal student loan forbearance is ending soon. Don’t miss out on savings—start planning your refi today.” While the mailer did include a disclosure in its fine print, stating that borrowers should consider President Biden’s plan to erase some or all of their student loan debt before refinancing, it is easy for borrowers to overlook this information.

On its website, Earnest, another student-loan refinancer, warns borrowers who refinance federal loans about the repayment options they would be giving up. Earnest specifically notes that they do not offer income-based repayment plans or Public Service Loan Forgiveness. Yet, many borrowers may miss out on this information if they do not read through the fine print or FAQs thoroughly.

By refinancing with private lenders, borrowers risk losing access to a range of federal benefits that are not available for privately-held loans. These benefits include broad student-loan forgiveness, federal income-driven repayment plans, Public Service Loan Forgiveness, and total and permanent disability discharge, among other things.

This is not the first time these issues have arisen. Last year, when President Biden first announced his debt relief plan, refinancers were doing similar outreach to borrowers. The Consumer Financial Protection Bureau (CFPB) expressed concern regarding whether student lenders were fairly representing the tradeoffs of refinancing to a private loan.

Tanya Burnett, a 57-year-old student-loan borrower who works in public service, previously shared her personal experience with refinancing. When she started her paperwork to qualify for the Public Service Loan Forgiveness (PSLF) Program in 2016, she was given the option to refinance her student loans with a private lender, resulting in a monthly payment $200 less than what she had previously been paying. Unsuspectingly, she signed the refinancing paperwork but had no idea it meant she was losing access to PSLF.

Burnett expressed her regrets, saying, “I didn’t know there was that disconnect. I thought that lower monthly payment was great. But if I had known this would totally have taken me out of the federal, and there’s no connection at all regarding forgiveness, I never would have done that. It wasn’t worth it.”

To assist borrowers during this transition period, the Education Department has introduced the SAVE Plan, an income-driven repayment plan intended to lower monthly payments. However, this plan is only available for federal borrowers, meaning those who refinance with a private lender before the payment restart will not be able to access it.

The CFPB recognizes the potential risks involved in refinancing and has advised borrowers to be cautious when considering such offers. If borrowers suspect that companies are engaging in misleading behavior, they are encouraged to submit a complaint through the CFPB’s website.

In conclusion, the restart of the student-loan system has left borrowers in a state of confusion and uncertainty. While private loan companies are enticing borrowers with promises of lower payments and better interest rates, it’s vital for borrowers to carefully consider the tradeoffs and potential loss of federal benefits. Reading the fine print and understanding the implications of refinancing is crucial to ensure that borrowers make informed decisions. The CFPB is committed to monitoring refinancing practices and protecting borrowers’ interests, but ultimately, it falls on borrowers to navigate the complexities of the student-loan landscape.