Student-Loan Companies Offering Lower Payments Puts Borrowers at Risk

• Some student-loan companies are encouraging federal borrowers to refinance before payments resume.
• Refinancing could strip borrowers of all federal benefits, including broader debt relief.
• The CFPB said it monitors how companies advertise refinancing to borrowers.

It’s a volatile time for millions of student loan borrowers.

After three years of not being asked to pay their federal student loans, they will soon start receiving their first monthly bills before the October deadline. Interest will start accruing on their balances again in September, and moreover they won’t be embarking on this reopening without any relief. The Supreme Court has nullified President Joe Biden’s plan to cancel up to $20,000 in student loans. Federal borrowers at the end of June.

Advertisements from some student-loan companies may be adding to the turmoil as both borrowers and the education ministry prepare to reopen the massive student-loan program. be. Companies that manage private lending have begun contacting federal debtors to encourage them to refinance their federal debt in order to favor payments. But refinancing can be costly. Many federal programs to help borrowers are not available when a borrower’s loan is held by a private lender. The same is true if a private financier accepts such an offer.

For example, student loan refinancing company SoFi sent a letter last month with the headline, “Federal student loan moratorium ends soon. Don’t miss the savings. Start planning your refinancing today.” sent to the borrower.

The fine print in the mail reads, “If you are an eligible federal student loan borrower, you should consider President Biden’s plan to erase some or all of your student loans before refinancing. But now… It should also take time now,” the disclosure included. To prepare for the return of payments, such as opportunities to refinance student loans at lower annual interest rates or extend terms to reduce monthly payments. “

Ernest, another student loan refinance agent, writes: website The FAQ states, “Borrowers refinancing their federal student loans should be aware of repayment options they are waiving. not.”

Even with these disclosures, borrowers who do not read the details and frequently asked questions risk refinancing in hopes of lower payments, higher interest rates, and access to various federal benefits not available in private lending. may miss. , including, among others, extensive student loan forgiveness, federal income-driven repayment plans, public service loan forgiveness, and full and permanent disability forgiveness.

After Mr. Biden first announced his debt-relief plan last year, refinancing companies made similar efforts to borrowers. Andrea Matthews, an adviser to the Commissioner for Consumer Financial Protection, told Insider in September, “The benefits of having a federal student loan are more tangible than ever. It raises serious concerns about whether it fairly represents the trade-offs of refinancing to loans.” “

“I didn’t know there was such a disconnect.”

An insider previously spoke to 57-year-old Tanya Barnett, who takes out student loans and works as a civil servant. In 2016, when she began working to qualify for the Civil Servant Loan Forgiveness Program, the program exempts government and non-profit employees from student loans after 10 years of qualifying payments. , she was given the option to refinance her student loans with a private lender for monthly repayments. She paid $200 less than she used to pay.

It seemed like a good deal to her, so she signed the refinancing papers, not knowing that it meant losing access to the PSLF.

“I didn’t know there was such a disconnect,” Barnett said at the time. “I thought it would be great to have less monthly payments. But if I knew this would get me out of the federal government for good, and that it had nothing to do with pardons, I would never have done that.” No, it wasn’t worth it.”

Borrowers can enroll in the Department of Education’s new SAVE plan before federal payments resume in October. This is an income-driven repayment plan aimed at reducing monthly payments. The plan is only available to federal borrowers, so anyone who refinances with a private lender before payments resume will lose access to the plan.

A CFPB official told an insider that refinancing has caught the CFPB’s attention as borrowers prepare to begin repayments. The official said borrowers should file complaints through the CFPB website if they suspect companies are misleading them, without mentioning the potential risks that refinancing could pose. He recommended that we should be weary of advertising by private companies.