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The Student Loan Forgiveness Risks from Refinancing

Refinancing student loans is a great way to lower interest rates and monthly payments. Unfortunately, this move may negatively impact student loan forgiveness options.

Written By: Michael P. Lux, Esq.

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Student loan refinancing is a powerful resource.

Used correctly, refinancing can help borrowers save a fortune on interest and keep monthly payments manageable. Used incorrectly, it can erase student loan forgiveness options.

How Does Refinancing Impact Student Loan Forgiveness?

When you refinance your student loans, a private lender pays off some or all of your current loans. A new refinance loan is created that the borrower must repay.

The purpose of the refinance is for the borrower to use their improved credit score and/or income to qualify for better loan terms.

However, because a new loan is created, benefits that came with the previous loan are erased. A new loan means new terms and conditions. In some cases, borrowers might be better off by keeping their old loans — even if it means living with a higher interest rate.

In most cases, opting to refinance significantly reduces, or eliminates, any chance of student loan forgiveness. As a result, refinancing some loans is riskier than others.

Tax Considerations: Refinancing your student loans usually doesn’t impact your ability to deduct student loan interest on your tax return. However, spending less on interest does mean a smaller deduction.

Three Categories of Student Loan Risk when Refinancing

Refinancing isn’t always a good idea, and it isn’t always a bad idea.

Instead, borrowers need to carefully consider the consequences of having a new loan replace their old loans.

I usually break refinancing down into three different categories:

Extremely Dangerous to Refinance

Are you chasing after Public Service Loan Forgiveness? Do you need the option of an income-driven repayment plan?

Federal student loans have interest rates that are a bit high, but federal loans also have the best borrower protections. Private lenders cannot compete with the federal loan terms.

If you think you are likely to take advantage of any of the various federal programs, don’t refinance your federal loans into a private loan.

Use Caution when Refinancing

Some borrowers have federal student loans, but they don’t see a need for federal perks and protections.

These borrowers may have reviewed the various forgiveness programs available and concluded that they wouldn’t qualify. Similarly, their income is high enough that an income-driven repayment plan doesn’t help save money.

If student loan elimination is just a matter of time for you, and you have the option to save a bundle by lowering interest rates, it might make sense to refinance your federal loans into a private loan.

However, even in this circumstance, caution is still necessary. Once you refinance your federal loans into a private loan, there is no way to undo the process.

Refinancing is a Safe Option

If you have private student loans, refinancing is a much safer option.

You are not giving up any federal perks. Instead, you are trading one private lender for another.

Additionally, it is worth noting that you don’t have to refinance all of your student loans. Borrowers can pick and choose which loans get refinanced and which loans stay with their current lender.

What about student loan cancellation or forgiveness for private loans?
Some borrowers fear that by refinancing their private loans, they may miss out on possible loan forgiveness or cancellation in the future.

However, student loan forgiveness at this point is unlikely. If it did happen, it almost certainly would not apply to private loans. Finally, if by some miracle there was private loan forgiveness, a private refinanced loan would almost certainly receive the same treatment as other private loans.

Finding the Best Refinance Lender

This site reviews and ranks all of the refinance lenders on the market.

However, the vast majority of borrowers should focus on finding the lender offering the lowest interest rate. Slight differences in customer service and lender reputations usually are not enough to justify paying a higher interest rate.

As of July 2024, the following lenders offer the lowest interest rates:

RankLenderLowest RateSherpa Review
T-1ELFI5.28%ELFI Review
T-1Splash Financial5.28%*Splash Financial Review
3Laurel Road5.49%Laurel Road Review

Alternatively, if a reduced interest rate and lower monthly payment are more appealing, a 20-year fixed-rate loan might make the most sense. As of July 2024, the following lenders have the lowest rates in the 20-year fixed-rate category:

RankLenderLowest RateSherpa Review
1Splash Financial6.08%*Splash Financial Review
2Laurel Road6.55%Laurel Road Review
3ELFI6.64%ELFI Review
About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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