Although President Biden has laid the foundation for student debt cancellation, the proposal seems unlikely to get passed by Congress. Some politicians are pushing to drop the plan altogether. Instead, they have proposed an alternative to student debt cancellation – The Coronavirus Emergency Student Loan Refinancing Act of 2021. The main aim of the act is to help federal student loan borrowers save money on their loans by refinancing.

Here are some things you should know if the proposal to refinance student loans gets passed.

The Coronavirus Emergency Student Loan Refinancing Act Of 2021 

The federal government currently doesn’t offer financing. As of now, you can only refinance with a private lender. The downside of doing this is you would lose all protections associated with the original loan.

If this proposed legislation is passed in Congress, you would be able to refinance federal loans with the federal government. This means you would not lose any of the original protections when you refinance. You would also get the money-saving benefit from the lower rates.  The act, if it is passed, only applies to federal student loans, including Direct Loans and FFELP Loans. You cannot refinance private student loans through the federal government.

The proposed legislation hasn’t yet specified what requirements borrowers would need to meet to qualify for refinancing through the federal government. In the most likelihood, the standard criteria would apply. Your financials would have to be in good standing. You may also need to meet a certain threshold regarding income or debt-to-income ratio. However, nothing is confirmed yet.

Refinancing federal student loans would not be an automatic process. Borrowers interested in refinancing would have to submit an application to the federal government along with the requested documents.

Setting Interest Rates On Federal Student Loan Refinance  

There’ll be several differences between federal and private student loan refinancing. The biggest difference will be the interest rates. With private student loan refinancing, every borrower pays a different rate depending on their credit score and other financial credentials. With federal student loan refinance, these factors won’t matter. All borrowers who wish to refinance their federal student loans would pay the same interest rate regardless of credit score. This rate would be based on the lowest yield on the 10-year Treasury note in the previous 6 months.

The current 10-year Treasury yield is 1.56%. Based on this, interest rates on undergraduate student loans would be about 3.16%. Interest rates on graduate student loans would be about 5.16% and interest rates on PLUS loans would be 6.16%. It’s important to note that this could change any time if market conditions change. Depending on market conditions, your interest rate could be higher or lower than the estimated rates above.

Should You Refinance With The Federal Government?

There’s no one answer that’s right for everyone. It depends on your financial situation and your long-term financial goals.

If the act passes, refinancing with the federal government would be completely optional. It may be right for you if you want to benefit from lower interest rates and also want to keep the federal loan benefits.

Refinancing with a private lender may be right for you if your strong financials qualify you for an interest rate that’s lower than the federal government is offering. However, you should choose this option only if you’re not interested in any of the federal loan protections.