The 2020 presidential race has made student loan planning very difficult for borrowers. Elizabeth Warren and Bernie Sanders are both promising student loan forgiveness. Should borrowers adjust their student loan strategy and refinancing decisions because the student debt might get canceled?
Student loans could be forgiven as a result of the 2020 election, but it is unlikely. Borrowers can’t ignore this possibility, but they shouldn’t assume it will happen. In student loan planning, borrowers should consider the many different ways student debt might be canceled.
In other words, the debt might go away, and it might not. The forgiveness could happen as promised, or it might look much different. In the face of this uncertainty, borrowers should carefully consider the consequences of any significant student loan decision.
Should I refinance or hope for all student debt to be canceled?
This reader email is an excellent example of a situation that many borrowers might face:
I currently have $223,000 in student loans and on the REPAYE with payments of $835. I have been recently promoted twice since my last recertification; however, according to the online calculator, my payments should only go up when my full salary hits which will not be until 2021 (when my full bonus would be paid out from 2020). I am at a crossroads to decide whether I should refinance my government loans for a lower interest rate and a 20-year term, payments would be around $1500. With all of the political attention to student loans, I am trying to determine whether it makes sense to refinance at this time (or at all) and ride out the next 20 years until forgiveness (presuming the forgiveness laws are updated not to include a giant tax hit). I am a little lost at this point, and not sure what makes the most sense financially.
Student loan forgiveness remains a long shot
Of the dozens of candidates running for president, the only two candidates proposing significant debt cancellation are Elizabeth Warren and Bernie Sanders.
Two top Democrats getting behind debt cancellation is an exciting development for borrowers, but it has a long way to go to become a reality. Getting elected would only be a small part of the equation. Both candidates are also calling for funding for free college, and such a measure would have a tough time getting through Congress. Creating a system where higher education was more affordable or free, is also necessary for any debt cancellation to happen. If the rising cost of a college education isn’t addressed first, canceling existing student loans becomes less effective, more risky, and less popular.
Before anyone pins their hopes on a Democratic president for giving massive amounts of student debt, it is worth remembering that this is the same party that has been calling for universal healthcare since the 90s. Often the ideas are discussed at great length before they ever become a reality.
When Elizabeth Warren first proposed forgiving student loans, we did some math on the cost of betting on loan forgiveness against the potential return. As things stand right now, the odds show that it is probably a bad bet.
How could 2020 loan forgiveness work?
One thing that Bernie Sanders and Elizabeth Warren agree upon is that they want to make their debt forgiveness/cancellation apply to both federal student loans and private student loans.
If we take the candidates at their word, people like Ben should be able to refinance their student loans without having to worry about missing out on a great government program. Unfortunately, even if elected, Warren and Sanders may not be able to deliver on their exact promises. Because the government owns federal student loans, this debt may be more likely to be forgiven. The government might decide that borrowers don’t have to pay back their loans. Private loans are a different story. It would require massive spending from the government to pay off the private loans. As a result, this is one corner that could be cut. Reader Ben should know that there is a possibility, though small, that federal loans could be forgiven and private loans might not be.
Another difficulty with predicting loan forgiveness is the fact that Warren and Sanders have a significant disagreement on the amounts that can be forgiven. Senator Warren wants to forgive up to $50,000 per borrower while Senator Sanders does not want to impose a limit. Reader Ben would be much better off with the Sanders plan, but either proposal could change in time.
Thus far, we have just discussed the student loan plans of two candidates. Other ideas are floating around, and there are many things that a new president could do that would help borrowers. Debt cancellation is far from the only option.
Student loan refinancing choices
Reader Ben correctly notes that politics are not the only concern when it comes to student loan refinancing decisions.
Opting to refinance means giving up on income-driven repayment plans like REPAYE and not being able to qualify for the existing federal student loan forgiveness programs. These are significant perks to pass up for someone with over $200,000 in student loans.
The other side of the equation is the potential savings on interest. Some borrowers make the mistake of chasing after forgiveness or lower payments and end up spending more money in the long run.
Anyone in a situation like Ben’s should do some quick math. Investigate the interest rates available in a student loan refinance to figure out how much money could be saved. Once you know how much you can save, it becomes a risk versus reward question. I like to treat it as an insurance policy. If a borrower lost their job, having income-driven repayment and loan forgiveness options are incredibly valuable. If they continue to earn good money like Ben, these programs may never get utilized. Think of the extra money spent as an unemployment insurance policy. If the policy doesn’t cost much and might get used, refinancing might be a mistake. However, if the interest spending is high, that insurance policy might be too expensive and not worth keeping. In that case, it might be time to refinance.
Putting politics into the equation
Going back to Ben’s question about what makes the most sense, there isn’t a clear answer.
Putting politics aside, the decision to refinance is already tricky. Adding politics to the refinance equation complicates the analysis further.
Because promises from politicians are far from guarantees, we think debt cancellation proposals are best viewed as a tie-breaker. Ben already has a lot to consider as he evaluates his refinancing options. If he runs the numbers and is still on the fence about what choice is best, hoping for 2020 forgiveness could tip the scales. Alternatively, if Ben sees a definite advantage to refinancing, hoping for an unlikely gift from the government would be unwise.
The most important step
Admittedly, this article contains a lot of speculation and what-ifs… such is the nature of trying to predict the future.
Borrowers can give themselves migraines trying to figure out all of the different possibilities and political outcomes.
Before playing the what-if game, the first thing to investigate is the potential savings from refinancing. If there isn’t much of an improvement in interest rates, there is no reason to explore this issue any further. If there is a chance to save some significant money on interest, the refinancing option deserves serious consideration.
All lenders have different rates and rules for evaluating borrowers, and the lowest advertised rates only apply to five-year variable-rate loans. To discover the actual amounts that can be saved, borrowers should check rates with a few companies. Those looking to do some quick math before a credit pull should consult our best rates available page to get an idea of the lowest rates on the various loan types.
The bad news is that there isn’t an easy answer for borrowers like Ben. The good news is that any borrower can do a bit of research and put themselves in a great position to make the smartest decision possible.