Private Student Loan Refinancing Could Cost Borrowers Federal Benefits, CFPB Says

Students study in the Perry-Castaneda Library at the University of Texas at Austin, on Feb. 22, 2024. Brandon Bell/Getty Images

With the Federal Reserve lowering interest rates and further cuts anticipated, some federal student loan borrowers are considering refinancing. However, the Consumer Financial Protection Bureau (CFPB) is advising borrowers to use caution and carefully weigh the tradeoffs.

In a report published on Nov. 16, the CFPB said some private lenders are using “deceptive” marketing tactics that mislead borrowers about a critical downside of refinancing: the loss of access to federal student-loan forgiveness options.

“Companies break the law when they mislead student borrowers about their protections or deny borrowers their rightful benefits,” CFPB Director Rohit Chopra said in a statement. “Student-loan companies should not profit by violating the law.”

According to the report, some private lenders give the false impression that refinancing federal loans won’t necessarily result in forfeiting federal forgiveness options. In reality, the federal agency stressed, “it was a certainty.”

The federal government offers a range of student debt-forgiveness programs, including Public Service Loan Forgiveness (PSLF) and teacher-loan forgiveness (TLF).

Under the PSLF program, eligible borrowers can discharge their remaining loan balance after making 10 years of qualifying loan payments while working on public-sector jobs such as military service, law enforcement, and public health. The TLF allows teachers to have up to $17,500 of their loans canceled after working for five years in low-income public schools.

Borrowers who refinance federal loans into private ones also forgo eligibility for President Joe Biden’s “Plan B” student debt-cancellation proposal. This plan—crafted after the U.S. Supreme Court struck down the administration’s initial attempt to cancel up to $20,000 in debt for each borrower—is currently under review by the Office of Management and Budget.

In addition, borrowers switching to private loans lose access to income-driven repayment plans, which allow payments to be capped at a percentage of discretionary income, with loan forgiveness offered after 20–25 years, depending on the plan. These option could be vital for financially struggling borrowers.

“The lenders profited from borrowers paying the full amount of their loans, when the borrowers otherwise potentially could have had some or all of those loans forgiven,” the bureau wrote in its report.

Interest rates on private student loans are generally higher than those for federal student loans, which are set annually by Congress and not directly tied to the Federal Reserve’s rate changes. However, private loans often come with higher borrowing limits, making them an option for those who need to cover expenses beyond federal loan caps.

Private lenders may provide borrowers with additional perks, such as interest rate discounts for enrolling in automatic payments. Some lenders offer discharge options in cases of death or disability, but many do not.

Student loans represent the second-largest category of consumer debt in the United States, totaling approximately $1.77 trillion. Federal student loans dominate the student lending market, accounting for the vast majority of outstanding debt, while private loans make up just 7.2 percent of the total.