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Dear Quentin,
I graduated from college in 2017 with more than $210,000 in federal student-loan debt thanks to out-of-state tuition, a master’s program, and not fully understanding this cost at that time. I’ve chiseled away at the debt since, often making greater than the minimum payment.
The student-loan pause during the pandemic also greatly benefited me — I was fortunate enough to keep my job and continue to make payments, at this point all toward principal, and I’ve saved tens of thousands by taking advantage of the 0% interest rate.
I recently applied to refinance my loans (now around $160,000) while federal interest rates were low, and I was approved for an interest rate almost half of what it currently is.
The refinance would also put my parent PLUS loans into my name so I can take advantage of the student-loan interest tax benefit that my mom used to be able to claim, although I was making the payments, as they are legally under her name.
I timed the refinance strategically — just before the Federal Reserve raised interest rates in March, and as close to the end of the student-loan pause as possible.
“‘I don’t think it’s likely that there will be any loan forgiveness, but I can’t help but be hopeful because of how helpful it would be for me.’ ”
The pause was supposed to end in May, but it was just announced that it would now be extended through August, and there was nothing more communicated on the possibility of federal student-loan forgiveness.
I don’t think it’s likely that there will be any loan forgiveness, but I can’t help but be hopeful because of how helpful it would be for me. Of course, I want the lower interest rate offered through my refinance, but if I go through with it, the loan will be privatized and no longer eligible for any future forgiveness.
Do I forgo the offer to refinance my federal student loan for the remote chance that there will be loan forgiveness in the future? Or do I give up on that dream and refinance now, while my rate is potentially the lowest it could be in a very long time?
Hoping Beyond Hope
Dear Hoping,
Yours is not the first letter I have received about this issue. In fact, another letter writer recently wondered if he should stop paying his student loan altogether. (The answer is no, in the event that he is reading this.)
Defaulting on a federal student loan can impact tax refunds or Social Security benefits. I understand your and the other letter writer’s concerns, and the temptations to wait for student-debt cancellation, even if it appears unlikely.
Yet struggling to keep up with paying these loans can delay retirement savings and disrupt a person’s ability to save for a down payment on a home. It’s a massive weight: Americans collectively owe more than $1.7 trillion in student-loan debt.
Student-loan debt also has a disproportionate impact on borrowers of color and Black borrowers in particular, which further impedes their social and economic mobility and helps to exacerbate the racial wealth gap.
I’m skeptical about the likelihood of broad loan forgiveness. Making decisions now based on a pie-in-the-sky hope that your federal student-loan debt will be canceled is risky. Even the Public Service Loan Forgiveness program is a long, onerous and often fraught process.
“Making decisions now based on a pie-in-the-sky hope that your federal student-loan debt will be canceled is a risky move. ”
Mark Kantrowitz, the author of “How to Appeal for More College Financial Aid” and “Who Graduates from College? Who Doesn’t?” puts it this way: “No matter how low an interest rate you can get on a private student loan, you can’t beat 0%.”
“Broad student loan forgiveness is more likely now than at any point previously. If student-loan forgiveness will happen, it is likely to happen before the midterm elections, when it can benefit Democrats in the polls,” he said.
However, the prospect being “more likely” does not mean it will happen. “For example, there’s no reason why borrowers with private student loans shouldn’t refinance those loans if they can qualify for a lower interest rate,” Kantrowitz said.
“‘To pass broad student-loan forgiveness, [Democrats] would need to use a budget reconciliation bill, which cannot be filibustered.’”
“With Democrats controlling the Senate by the slimmest of margins, every Democrat has a veto. To pass broad student-loan forgiveness, they would need to use a budget reconciliation bill, which cannot be filibustered,” he said.
There are several Democratic lawmakers who are uneasy about spending billions of dollars on loan forgiveness, Kantrowitz points out, especially as that money must be made up for elsewhere in the government coffers.
“Fifty thousand dollars in loan forgiveness per borrower, as proposed by Sen. [Elizabeth] Warren, will cost more than $1 trillion,” he added. “Even President Biden’s proposal, to forgive $10,000 per borrower, will cost $377 billion.”
“An alternative is to forgive just the loans of borrowers who owe $10,000 or less, which would still erase the federal student-loan debt of a third of borrowers, but cost only $75 billion,” Kantrowitz said.
Biden has provided almost $17.5 billion in loan forgiveness and discharge through existing programs, he said, including Public Service Loan Forgiveness, disability discharges, closed school discharges and the borrower defense to repayment.
So will broader student-loan forgiveness — the kind that you and millions of other graduates are hoping for — actually happen? “More likely than not,” Kantrowitz said. In addition, more loan pauses will be less likely after the midterm elections.
Sometimes, taking no action is an action. Don’t stop paying student loans based on the assumption that your loan will be canceled. And if you hold out hope, wait before refinancing. Just know that decision could end up costing you more.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
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