Student Loan Forgiveness: It's Not as Difficult as You Think

 Should You Wait For Student Loan Cancellation?

Here’s what you need to know.

Student Loans

After nearly a year, and in some cases longer, some student loan borrowers are still hoping for student loan cancellation. To date, however, there hasn’t been any wide-scale student loan cancellation. If you have student loans, you may be wondering whether you should wait for student loan cancellation, if it ever comes, or take a more proactive approach to student loan repayment. Here’s what to consider:

Option 1: Wait for student loan cancellation

You could wait it out and hope that your student loans get cancelled. While there hasn’t been any wide-scale student loan cancellation, that doesn’t mean there won’t be any tomorrow. Progressives in Congress are still calling on Biden to enact student loan forgiveness ranging from $10,000 of students to all $1.7 trillion of private and federal student loan debt. Biden has asked the U.S. Department of Education to opine on whether the president has the unilateral legal authority to enact student loan cancellation by executive order without furthere authorization from Congress. Education Secretary Miguel Cardona may deliver that non-binding legal memo to the president within weeks. For Biden to have the legal authority, however, the Education Department would have to conclude that Biden has complete and absolute authority to cancel an unlimited amount of student loans for all student loan borrowers. That’s a high bar to establish. Why? There are several legal reasons why the president doesn’t have unilateral authority, including that the statutory language in the Higher Education Act of 1965 is ambiguous. The Education Department also found in January during the Trump administration that the president didn’t have such authority. Therefore, Biden’s Education Department would have to reach the opposite conclusion, even though the Education Department conducted a similar analyiss only a few months ago.

Option 2: Refinance your student loans + wait for federal student loan forgiveness

A second option is to refinance your private student loans and keep all or some of your federal student loans outstanding. Why? There are at least 5 signs that Biden won’t enact student loan cancellation. Most likely, if there is any wide-scale student loan cancellation, it would apply to federal student loans only. While some legislators have called for private student loan forgiveness, the leading proposal in Congress from Senate Majority Leader Chuck Schumer (D-NY) and Sen. Elizabeth Warren (D-MA) applies only to federal student loans. If Biden proceeds to cancel student loans, he likely would cancel federal student loans only that are owned by the federal government. Therefore, you could refinance your private student loans now, particularly since rates for student loan refinancing have dropped to a record low. That’s great news for student loan borrowers. The next question is to decide whether you refinance some or none of your federal student loans. If there is $10,000 of student loan cancellation, you could keep $10,000 of federal student loans outstanding and refinance the remainder. If you think there will be $50,000 of student loan cancellation (which is highly unlikely), you could keep $50,000 of federal student loans outstanding and refinance the remainder. In either case, the goal is to save money on your student loans through student loan refinancing by getting a lower interest rate, a lower monthly payment, or both.

Option 3: Refinance all your student loans

A third option is similar to the second option, but there is a slight difference. If you don’t think there will be any student loan cancellation now or in the future, you could refinance all your student loans now, including both private and federal student loans. Importantly, when you refinance federal student loans, they become private student loans. As a result, you wouldn’t be eligible for any future federal student loan forgiveness. The upside, however, is that you get a lower interest rate, which can help you save money each month and pay off your student loans faster.

Option 4: Make extra student loan payments now

A fourth option is to make extra student loan payments now so that you can pay off student loans faster. To make extra student loan payments, you can either increase your monthly payment amount, or you can send a separate payment each month. In either case, contact your student loan servicer to alert them in advance of your student loan repayment strategy. Inform your student loan servicer that any extra payments should be applied immediately to reduce your principal and interest balance and should not be held until next month’s payment. You might not prefer this approach since federal student loan payments are paused through September 30, 2021. However, even small dollar amounts will directly lower your principal student loan balance since currently there is no interest accrual on your federal student loans.

Student loan cancellation: additional considerations

These aren’t the only considerations when it comes to student loan cancellation. For example, if there is any student loan cancellation, it’s unlikely it would apply to all student loan borrowers. For example, Warren and Schumer’s proposal applies only to student loan borrowers who earn up to $125,000 annually. If your income is higher, you likely won’t get student loan forgiveness and should consider alternative options such as student loan refinancing or income-driven repayment. It’s also possible there is a lower income threshold than $125,000. If Biden cancels student loans, the most likely amount would be $10,000. If you have more than $10,000 of student loans, which the average student loan borrower does, you’ll want a game plan for your remaining student loans.

Will your student loans get cancelled? There’s no guarantee either way, but it’s looking increasingly likely that there won’t be any student loan cancellation from the president or in Congress. Biden also didn’t include student loan cancellation in his latest stimulus package, infrastructure package, or budget proposal. Most importantly, when deciding whether to wait for student loan forgiveness, do what’s best for your unique personal and financial situation. For some borrowers, that could mean waiting for the chance for student loan forgiveness but paying a higher interest rate. For other borrowers, they prefer to get a lower interest rate now or make extra student loan payments, even if there is some student loan forgiveness in the future. Make sure you have a game plan for your student loans. Here are some potential options to consider:

Student Loans: Related Reading Biden drops student loan forgiveness from the latest budget Democrats propose to forgive student loans with 4 changes Student loan cancellation faces major setback Biden wants student loan cancellation 3 ways

When College Grads Should (And Shouldn’t) Refinance Student Loans

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Editor’s Note: This article is a part of a series on investing advice for recent college graduates, drawing on expertise from financial professionals, university faculty and of course, InvestorPlace’s very own analysts and writers. Read more “Money Moves for Recent Grads” here and check out Top Grad Stocks 2021 for our best stocks to buy for new graduates.

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Student debt is a huge burden, said American adults in a 2011 Pew Research survey. 10 years later, that burden is nearly unbearable. The latest statistics show that the national student loan debt balance was worth $1.70 trillion in 2020, compared to $0.96 trillion in 2011.

As the national student loan balance grows, more and more college graduates are struggling to repay the debt. According to figures from Educationdata.org, about 37% of graduate degree holders aged 60 years and older have outstanding student loans.

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College students who cannot pay for education out-of-pocket often rely on loans to get through school. Most students take out loans with the expectation that they’ll be able to repay them upon graduation.

But a combination of factors makes that easier said than done. Many young people take out loans without realizing the financial strain repaying them for years on end can cause. Stagnant wages and low-paying entry level jobs plus compounding interest often equals difficulty repaying the loans back quickly.

This is why so many students are left wondering how to pay off student debt in a fast, effective way that doesn’t leave them broke at the end of each month. And refinancing student loans is one such way.

What is Student Loan Refinancing?

Loan refinancing refers to securing new debt to repay outstanding loans. Often, the new loans come with lower interest rates and installments. Besides, refinancing shifts the repayment deadline further into the future, giving you a much-needed respite.

A downside of refinancing student loans may be increased total loan amount — lower monthly payments may mean a longer payment period and incurring more interest. But owing less monthly often gives those drowning in debt some room to breathe and get back on track.

With fixed-rate loans notching week after week of record low interest of late, new grads should seriously consider refinancing their student loans.

Refinancing Student Loans

If you think refinancing loans is the best option for you, here’s a step-by-step guide.

Step 1: Prequalify for Refinancing

In the actual sense, refinancing student loans entails a company buying your current loan obligation and extending you a new loan with different terms. That’s not going to happen if the company has doubts about your credibility.

So the first step involves finding out if the refinance lender can help you to refinance student loans. Different companies have different eligibility criteria. For instance, your credit score usually has to be pretty good. And your debt-to-income (DTI) ratio typically has to be less than 20%, preferably lower.

Step 2: Shortlist Appropriate Refinancers for Your Needs

Having established a rough idea about your eligibility for refinancing, it’s time to find the right lender. It is important to note that your situation determines the lender. For example, some lenders will only accept clients who have a college degree.

Step 3: Compare Rates And Repayment Terms Between Lenders

Ideally, you should end up with a list of lenders that accept clients in your situation. It helps to realize that each company charges different rates. Most lenders provide estimates based on the information you supply. Continue shopping until you find the lender with the lowest rates.

Step 4: Select the Best Option for You

Lenders tailor refinancing loans around either variable or fixed interest rates. Each structure impacts the total amount repayable differently. For example, variable rates are often lower at the beginning of repayment but then increase in the later stages. The problem here is that the structure makes for a longer repayment period, which increases the total loan amount.

It all comes down to how much you can afford per installment. If your income can support a fixed interest rate structure, all the better. This structure will shorten the repayment period, reducing the amount of interest you pay on top of your loan principle.

Step 5: Apply for Refinancing

A typical refinance loan application requires detailed personal financial information. The lender will want to know if you are financing another loan, a breakdown of your current income and so on. It is important to note that all the information you provide must be verifiable.

Qualifying for Student Loan Refinance

As with any other loan, the refinance loan requires borrowers to satisfy some preconditions. Although refinance lenders may use unique eligibility criteria, it is likely any lender will take a look at the following to determine your eligibility.

Your Credit Score

A credit score is a number that estimates your creditworthiness – basically, it measures your ability to repay debts. In the U.S., you are creditworthy if your credit score lies between 300 and 850. Most refinance lenders prefer a credit score of 650 and above.

Your Credit History

Lenders record all your loan-related transactions for later use. And lenders share those files among themselves. Lenders classify borrowers with unsound credit history as risky and they might reject their applications.

Your Income

No lender will accept your refinance loan application without proof of employment and income statements. The lenders need to know that you’ll have the cash to meet your obligations when they kick in.

Proof of College Degree or Graduation

Some lenders accept non-graduate clients but most won’t consider your application without a college degree. The assumption here is that college-educated borrowers have better chances at securing meaningful employment, and subsequently paying off their debts. A college degree is also solid evidence that the loan you wish to refinance actually went to paying for education expenses.

Credit Score

As we mentioned earlier, a credit score is a metric that estimates your creditworthiness. A low credit score will turn lenders away because you rank among risky clients.

But because lenders are in a business environment with tough competition, some of them are willing to take on higher risk. It means the acceptable credit score varies among lenders.

Fair Isaac Corporation (FICO) is a leading provider of credit score information to lenders in the United States. The company’s FICO Scores are a common reference point for the accepted range of credit scores needed to secure a loan.

A FICO Score below 580 is poor and above 800 is exceptional. You need to be in the ‘fair’ range – between 580 and 669 – to qualify for a loan from some lenders, although most lenders prefer FICO Scores above 669, which are ‘good’ or better.

When to Refinance Your Student Loans

There are times when refinancing your student loans may be a more viable or useful option than others.

Look for Low Interest Rates

The economic climate often cycles through recessions and upturns. As with all central banks worldwide, the Federal Reserve responds to economic cycles by cutting or raising the federal funds rate. The interest rate environment is inhospitable during a period of the economic boom because when the Fed raises the funds rate, private lenders follow suit to hedge their profits.

Therefore, the interest rate environment is best in a recession when interest rates are low, assuming that private lenders follow the Fed. You may see significant savings if you refinance student loans during this period because the new terms may include interest rates lower than the previous loan.

Your Finances are Solid(ish)

A higher salary lowers your debt-to-income ratio.  Lenders prefer borrowers with a low DTI because they are likely to pay off debts as agreed. You are likely to secure better terms when lenders perceive you as a reliable client.

You Have Private Student Loans

Federal student loans enjoy specific benefits that aren’t offered by private lenders. For instance, federal student loans are eligible for forgiveness or forbearance. The bad news is that you risk losing the benefits if you decide to refinance federal student loans with private lenders. As such, it is only sensible to refinance private student loans.

Will Refinancing Actually Help?

Most of the time, people refinance student loans mainly to reduce the total amount payable. Let’s say the interest rate environment is looking better, which makes it the right time to refinance. However, your credit score could be poorer than before, meaning you are likely to face harsher terms. In the long run, harsh terms will increase the total loan amount, which defeats the reason for refinancing in the first place. Weigh all the factors when you’re considering refinancing your student loans.

Refinancing vs. Consolidation

As earlier stated, refinancing student loans involves taking a new loan to pay for the outstanding one. The new loan has completely different terms and interest rates.

Conversely, student loan consolidation does not replace outstanding loans with a new one, but instead involves aggregating existing loans into a single one. The consolidated loan incurs a single fixed exchange rate, which is a weighted average of the previous loans’ interest rates.

The primary difference between student loan refinancing and consolidation is that refinancing can result in new terms, while they remain constant after consolidation. Consolidation only offers convenience when paying student loans, and maintains eligibility for federal loan forgiveness programs.

Don’t Expect Any Student Loan Cancellation

President Joe Biden (Photo by Ethan Miller/Getty Images)

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Don’t expect Biden to cancel student loans.

Here’s what you need to know

Student Loans

In the ongoing debate over wide-scale student loan cancellation, it’s unlikely that Biden will unilaterally cancel student loan debt through an executive order without further authorization from Congress. Impossible? No. Unlikely, yes. Biden has asked the U.S. Department of Education to review his legal authority to enact student loan cancellation and provide him with a non-binding legal opinion. However, as some scholars have noted, the legal case for student loan forgiveness may be an uphill climb. So, if Biden doesn’t cancel student loans, it won’t be a surprise for these reasons:

1. Student loan debt cancellation originated with progressives, not with Biden

Sen. Bernie Sanders (I-VT), a progressive senator, was an early champion of total and complete student loan cancellation. Sanders has repeatedly proposed to cancel all $1.7 trillion of student loan debt, including both private and federal student loans. As a presidential candidate, Sen. Elizabeth Warren (D-MA), a fellow progressive, proposed to cancel student loan debt for 95% of student loan borrowers. Warren has since modified her proposal to cancel up to $50,000 of federal student loans for student loan borrowers who earn less than $125,000 annually. Student loan cancellation originated with the progressive movement, not with Democratic legislators and candidates. While Biden supports student loan cancellation, the push for wide-scale student loan cancellation has come largely from progressives in Congress and policy advocates.

2. Biden never said he would enact student loan cancellation

There have been recent declarations about Biden breaking his campaign promise to cancel student loan debt. However, Biden never said he would cancel student loan debt. Rather, Biden said he supports $10,000 of student loan forgiveness for borrowers in the wake of the Covid-19 pandemic. For Biden, the Covid-19 pandemic and the associated financial distress for student loan borrowers was a driving factor in his proposal to cancel student loans. This is different than some other arguments that have been espoused for student loan cancellation, ranging from general unfairness to stimulating the economy. Biden also said that Congress, not the president, should cancel student loan debt. That’s an important distinction too, and Biden has never wavered on this point both as a candidate and as president. There are undoubtedly many policy initiatives that presidents would like to enact unilaterally by executive order, but there are constitutional and other legal limits in our system of checks and balances.

3. Congress is blaming Biden for not cancelling student loans, but Congress hasn’t cancelled student loans

It’s no secret that the blame game is alive and well in Washington. Some Democrats in Congress want to blame Biden, a fellow Democrats, and pressure him to enact student loan cancellation. However, Congress hasn’t passed any legislation on wide-scale student loan cancellation. None. The reason is that Congress doesn’t have enough votes to cancel student loans. Yes, Republicans won’t support wide-scale student loan cancellation. However, many Democrats won’t either. That includes a proposal for $50,000 of student loan cancellation, but it also includes $10,000 of student loan cancellation. If there were a roll call vote today on either of those proposals, you might be surprised to learn that there is not consensus among Democrats on student loan cancellation. Importantly, Biden has said he would sign any legislation on student loans that Congress sends to his desk. However, to date, that hasn’t happened. There have been plenty of proposals on student loan cancellation, including these four changes to student loan forgiveness. Proposals are not the same as action. That’s yet another setback for student loan cancellation. So, it’s not that everyone in Congress is simply waiting for Biden to act on student loans and he refuses. The reality is that Congress won’t act on student loans in the near-term, at least with current legislative proposals, and they’re hoping that Biden can somehow cancel student loans without clear authorization from Congress.

Student Loans: Next Steps

Will your student loans get cancelled? Biden dropped student loan cancellation from his new budget. He didn’t include student loan cancellation in his latest stimulus package or infrastructure package either. There are at least 5 reasons why Biden won’t enact student loan cancellation. The writing is on the wall: don’t expect student loan cancellation. Could Biden still enact wide-scale student loan cancellation? Sure. If the Education Department issues a memo that says the president has legal authority to cancel unlimited student loan debt for all student loan borrowers, then Biden would have some legal support to act through executive order. However, it’s unlikely the Education Department will say that for many reasons, including in January the Education Department during the Trump administration concluded the president cannot cancel student loans unilaterally without Congress. Importantly, Biden has cancelled more than $2.3 billion of student loans since becoming president. Student loan borrowers also will get $90 billion of student loan forgiveness through September 30, 2021, according to the Education Department. While some may challenge the amount of student loan cancellation or number of student loan borrowers who were impacted, Biden has acted swiftly to provide targeted student loan relief. Plus, Biden still wants to cancel student loans three ways. Expect more student loan cancellation from Biden, but it may not be as wide-scale as some hope.

If Biden doesn’t cancel student loans, which is a high likelihood, then make sure you understand all your options for student loans. Here are some potential options to consider, all of which have no fees:

Student Loans: Related Reading Democrats propose to forgive student loans with 4 changes Student loan cancellation faces major setback Biden wants student loan cancellation 3 ways A 4th stimulus check could look like this.👋👋👋👋👋👌👌👌👌👌👌👍👍👍👍👍👍👍