Will private student loans be forgiven?
The short answer: No.
Currently, the administration is only considering canceling federal student loans. And at last report, its remission plan will include a $10,000 cap for federal student loan borrowers, with income limits for single filers who earn $150,000 or less or $300,000 jointly. Federal borrowers are still awaiting the announcement of official plans. And the moratorium that suspended federal student loan payments is set to end on August 31, 2022.
What happens to private student loans?
Private student loans are issued by financial institutions such as banks, credit unions, and credit card issuers like Discover. These loans are not eligible for forgiveness because they are not distributed by the Ministry of Education. And borrowers with these loans were not exempt from paying during the federal student loan payment break.
Also, unlike federal student loans, interest rates on private student loans are variable. This means that when the Federal Reserve raises its benchmark interest rate – the government’s main tool for fighting inflation – the rates on these loans also increase. In contrast, federal student loan rates are set by the government and fixed over the term of the loan.
For example, federal undergraduate student loans taken out between July 1, 2022 and June 30, 2023 have a fixed interest rate of 4.99%. Rates reset every July. For private student loans, the interest rate can vary between 1% and 13%.
Why are the prices so different?
Interest rates on private student loans are based on the creditworthiness of the borrower. To get the best rate, you must have a good to excellent credit rating. (For FICO, that range is 670 to 800.) Or you’ll need to have a co-signer on the loan to lower your rate.
If you currently have a private student loan, there are ways to lower your interest rate. Talk to your lender and ask if they would lower your interest rate. Or you can request that the monthly payment be reduced, especially if your income has recently decreased.
Should you refinance?
Another solution to lower your current payments is to refinance your loan with a lower rate. If possible, try to lock in a lower rate as soon as rates rise more widely.
However, don’t blindly rush into a new loan for a lower rate alone, especially if you currently hold a federally issued loan. Refinancing a non-federally issued loan also means that you will also have to opt out of some of your current protections, including the continued suspension of interest charges. It may make more sense to wait to refinance until the end of repayment moratoria, even though you will be paying a higher overall interest rate for the time being.