Can Refinanced Student Loans Be Forgiven? Sort of—Here's How

Refinanced student loans cannot be forgiven by the federal government because you work in public service, have made payments for several years, or went to a sham school that’s closed its doors. But some refinancing lenders forgive private student loans if the primary borrower suffers a mental or physical disability that prevents them from working.

The difference in forgiveness options is a big reason why borrowers should weigh their options before refinancing federal student loans with a private lender.

The lower interest rate you may gain comes at a cost. You’ll lose out on unique federal loan benefits, such as income-driven repayment plans and relief programs that erase your debt based on your career or payment history.

Related: Best Student Loan Refinance Lenders

President Joe Biden’s debt cancellation plan will forgive up to $20 thousand of relief for federal student loan borrowers who received a Pell Grant and earned less than $125 thousand during either of the first two years of the Covid forbearance.

The program has a hidden benefit: Forgiveness for some borrowers who refinanced their federal student loans with a private lender during the pandemic.

To be certain, the forgiveness won’t be applied directly to your new loan. Instead, once it’s implemented, the Education Department will send you a check equal to the relief you’re entitled to receive as a refund for past payments.

Here’s how this works.

The Biden administration has said that borrowers who made voluntary payments towards their loans during the payment pause will get a refund automatically of the money they paid during that time.

Technically, the refinance loan paid off your federal student loan debt, which means the Education Department will send you a check equal to the amount of relief you’re entitled to receive as a refund for past payments.

You can use this money to pay down your refinanced loan balance, put it towards your credit card debt, or even invest in a fund that may deliver a greater return.

To qualify, your loans must have been eligible for the payment pause before refinancing them with a private lender.

Biden’s plan to forgive student loans for tens of millions of Americans led to a flurry of legal challenges from Republican lawmakers and conservative groups. The Education Department fended off most of these challenges with ease, but two cases – one filed by six state attorney generals in Missouri and another filed by two borrowers in Texas – proved to be more formidable opponents.

The department lost both cases, and the courts issued orders blocking it from applying the relief to borrowers’ accounts. The Biden administration appealed these rulings to the Supreme Court, and a decision is expected to be made by this summer.

The department has stated that it’s ready to deliver the forgiveness to borrowers shortly after the Supreme Court rules in its favor.

Since forgiveness is off the table for refinanced student loans, it makes sense to explore alternative repayment strategies. Here are six moves to consider:

• See if your employer offers student loan repayment assistance programs. Some companies offer a matching benefit to help pay down your student loan balance. If you’re hunting for a new job, look for employers providing this benefit.

• Consolidate your federal student loans to free up income. Student loan consolidation can put your payments on hold if you’ve had to pay your federal loans during the pandemic. The new Direct Consolidation Loan may qualify you for various federal student loan forgiveness programs the U.S. Department of Education offers, including the Teacher Loan Forgiveness and Public Service Loan Forgiveness Programs, and income-driven repayment plan forgiveness. Read more about the PSLF Waiver and IDR account adjustment.

• Refinance your loans. Student loan refinancing rates have hit near record lows as the pause on student loan payments has dragged on. Depending on your credit score and personal finances, you may be able to lock in a better fixed or variable rate on your loans, which can help lower monthly payments and the total interest you pay. Use a loan marketplace like Credible to compare lenders and loan terms and find the lowest rates. Read more about how many times you can refinance student loans.

• Ask your lender for different repayment options. If you’re struggling to keep up with your payments, ask your loan servicer for options to temporarily suspend payments with deferment, reduce your interest rate, or extend your repayment term. Read more about ways to lower student loan payments.

• Negotiate a settlement. If you can’t repay your loans, you may be able to settle for less than the current loan amount. Keep in mind that lenders won’t accept a settlement offer until you fall behind on payments. If that happens, the late payments will be added to your credit history, and collection costs will be tacked onto the balance. Read more about settling student loan debt.

• File student loan bankruptcy. The path to discharging student loans in bankruptcy might be expensive and filled with challenging standards that are hard to overcome. But suppose you can’t refinance a second time for a lower rate and payments or afford a settlement. In that case, bankruptcy may be your only option to get out from under the loan. Read more about private student loan bankruptcy discharge.

The White House has put a hold on federal student loan payments since the beginning of the coronavirus pandemic. It has also canceled billions of dollars in Federal Family Education Loans, Parent PLUS Loans, and Direct Loans owed to the government.

While these protections and federal benefits were not created to help borrowers with private student loans, due to the design of Biden’s cancellation plan, those who refinanced their federal loans with a private lender during the past two years should be eligible for a refund of up to $20,000, assuming they meet the eligibility requirements.

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