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- Some student-loan companies are encouraging federal borrowers to refinance before the payment restart.
- Refinancing could strip a borrower of all their federal benefits, including broad debt relief.
- The CFPB said it is monitoring how companies are advertising refinancing to borrowers.
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.
It's a time of confusion as both borrowers and the Education Department prepare to restart the massive student-loan system — and advertisements from some student-loan companies might be adding to that confusion. Companies that manage private loans have started reaching out to federal borrowers, encouraging them to refinance their federal debt to get a better deal on payments. But refinancing could come with a cost: Many of the federal programs to help borrowers out aren't available if a borrower's loans are held by a private lender, as would happen if they took up one of these offers.
For example, SoFi — a student-loan refinancing company — sent letters to borrowers last month with a header reading, "Federal student loan forbearance is ending soon. Don't miss out on savings—start planning your refi today."
The mailer did include a disclosure in its fine print stating that "if you are a qualifying federal student loan borrower you should still consider President Biden's plan to erase some or all of your student loan debt before refinancing; however, you should also take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment."
Earnest, another student-loan refinancer, wrote on its website in the FAQs that "borrowers who refinance federal student loans should be aware of the repayment options that they are giving up. For example, Earnest does not offer income-based repayment plans or Public Service Loan Forgiveness."
Even with those disclosures, borrowers who don't read the fine print or FAQs could risk refinancing with the hopes of lower payments or a better interest rate — and miss out on a range of federal benefits that aren't available for privately-held loans, like broad student-loan forgiveness, federal income-driven repayment plans, Public Service Loan Forgiveness, and total and permanent disability discharge, among other things.
Last year, after Biden first announced his debt relief plan, refinancers were doing similar outreach to borrowers. Consumer Financial Protection Bureau Advisor to the Director Andrea Matthews told Insider in September that "the benefits to having a federal student loan have never been more tangible. This raises serious concerns about whether student lenders are fairly representing the tradeoffs of refinancing to a private loan."
'I didn't know there was that disconnect'
Insider previously spoke to Tanya Burnett, a 57-year-old student-loan borrower who works in public service. When she started her paperwork to qualify for the Public Service Loan Forgiveness Program in 2016, which forgives student debt for government and nonprofit workers after ten years of qualifying payments, she was given the option to refinance her student loans with a private lender with a monthly payment $200 less that what she had previously been paying.
It sounded like a good deal to her, so she signed that refinancing paperwork — and had no idea it meant she was losing access to PSLF.
"I didn't know there was that disconnect," Burnett said at the time. "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."
Before federal payments resume in October, borrowers can enroll in the Education Department's new SAVE Plan, which is an income-driven repayment plan intended to lower monthly payments. That plan is only available for federal borrowers, so those who refinance with a private lender before the payment restart will not be able to access that plan.
A CFPB official told Insider that as borrowers prepare to enter repayment, refinancing is on the agency's radar. The official recommended that if borrowers suspect companies are engaging in misleading behavior, they should submit a complaint through the CFPB's website — and be weary of any advertisements from private companies that do not mention the potential risks refinancing could bring.