CFPB Warns: Borrowers May Lose Federal Benefits When Refinancing Private Student Loans
The agency warns that refinancing leads to the loss of critical federal protections.
As the Federal Reserve reduces interest rates with further cuts expected, some federal student loan borrowers are contemplating refinancing. However, the Consumer Financial Protection Bureau (CFPB) is urging these borrowers to proceed with caution and thoroughly consider the potential downsides.
The report indicates that some private lenders create a misleading impression that refinancing federal loans won’t automatically result in losing federal forgiveness options. In fact, the federal agency emphasized, “it was a certainty.”
The federal government provides various student debt relief programs, such as Public Service Loan Forgiveness (PSLF) and teacher loan forgiveness (TLF).
Under the PSLF initiative, eligible borrowers can eliminate their remaining loan balance after making 10 years of qualifying payments while working in public sector roles such as military service, law enforcement, and public health. The TLF allows teachers to qualify for up to $17,500 in loan forgiveness after working for five years in low-income public schools.
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Borrowers who convert their federal loans to private ones will also lose eligibility for President Joe Biden’s “Plan B” student debt cancellation proposal. This proposal was developed after the U.S. Supreme Court rejected the administration’s initial plan to forgive up to $20,000 in debt per borrower and is currently under the review of the Office of Management and Budget.
Moreover, borrowers switching to private loans forfeit access to income-driven repayment plans that cap payments based on a percentage of discretionary income, with loan forgiveness available after 20 to 25 years, depending on the selected plan. These options can be crucial for borrowers facing financial difficulties.
“The lenders gained profits from borrowers repaying the full amount of their loans when these borrowers could have potentially qualified for some or all of those loans to be forgiven,” the bureau noted in its report.
Typically, interest rates on private student loans are higher than those for federal loans, which are determined annually by Congress and not directly influenced by the Federal Reserve’s rate changes. However, private loans may allow for larger borrowing limits, making them appealing for those needing to finance expenses beyond federal loan limits.
Private lenders might offer borrowers additional benefits, like interest rate reductions for signing up for automatic payments. Some lenders provide discharge options in cases of death or disability, although many do not.
Student loan debt constitutes the second-largest form of consumer debt in the United States, totaling approximately $1.77 trillion. Federal student loans dominate the lending landscape, accounting for the vast majority of outstanding debt, whereas private loans represent only 7.2% of the total.
