Amid Biden's student debt forgiveness push, refinancing student debt is risky, and borrowers may forever lose access to safety nets, advocates warn.

• Consumer advocates caution that refinancing federal student loan debt may be riskier than before as more protections and relief options become available.
• Persis Yu, deputy executive director at the Student Borrower Protection Center, stated that private student loan borrowers are often excluded from necessary programs.

Consumer advocates urge caution before refinancing federal student loan debt as affordable options and relief measures accumulate.

Betsy Mayotte, president of The Institute of Student Loan Advisors, issued a stern warning in an email to CNBC: "DON'T!"

A lower interest rate is the primary reason why borrowers typically refinance their federal student loans and convert them into private loans.

The Student Borrower Protection Center's deputy executive director, Persis Yu, stated that many individuals are unaware of the consequences they face when taking out loans.

"Private lenders have been employing aggressive marketing tactics to entice borrowers away from federal student loans, leaving many in need without access to essential programs, according to Yu."

Federal student loan interest rates may rise by 1 percentage point. Tax refunds worth $1 billion from 2020 expire on May 17. New graduates may face challenges in securing their dream job.

Federal loan refinancing results in the loss of safety nets and lower payment options for borrowers.

Earnest CEO David Green stated that refinancing can be "transformative" for individuals who are ineligible for government aid programs.

Green stated that by spending less time paying off your loan or having a more reasonable monthly payment, you can save a considerable amount of interest over the course of your loan.

Refinancing is risky ahead of Plan B forgiveness

Private lenders do not offer the same range of relief options as the U.S. Department of Education, such as pausing payments for unemployment, returning to school, or getting cancer.

The Biden administration is reforming the federal student loan system, and advocates are issuing new warnings.

Since President Joe Biden took office, the Education Department has discharged federal education loans for approximately 4.6 million individuals, amounting to nearly $160 billion in aid. The majority of this relief was achieved through expanding eligibility for relief programs.

If Biden's revised relief package survives legal challenges, millions more federal student loan borrowers could receive debt forgiveness in the coming months.

After the Supreme Court blocked the president's first aid package, his administration started working on a Plan B. Over 25 million borrowers can still benefit from the program, including those who have been in repayment for decades or seen their balance increase due to interest.

Borrowers lose access to relief programs

Mayotte stated that borrowers who refinance their loans lose their eligibility for the government's debt cancellation.

No longer qualifying for the Public Service Loan Forgiveness program, she said, PSLF enables certain not-for-profit and government employees to have their federal student loans cleared after 10 years of on-time payments.

Mayotte stated that she has encountered numerous borrowers who refinanced their loans, only to discover that they would have been forgiven under PSLF.

One borrower from Mayotte recently admitted to refinancing their student loan based on advice from their financial advisor, resulting in missing out on having their $400,000 balance forgiven when the Education Dept. excused 317,000 former Art Institute students of their debts earlier this month.

"[It] was heartbreaking," Mayotte said.

The Education Management Corp. and its Art Institute chain of schools were found by the U.S. Department of Education to have made "substantial and pervasive" misrepresentations to students regarding post-graduation employment rates, salaries, and career services, based on evidence provided by attorneys general in Iowa, Massachusetts, and Pennsylvania.

Repayment options are a 'huge, huge difference'

Federal student borrowers can opt for income-driven repayment plans that require them to pay only a portion of their discretionary income towards their debt each month. These plans also lead to debt forgiveness after a specified time frame, typically between 10 and 25 years.

The Biden administration recently introduced a repayment plan that reduces the percentage borrowers need to pay of their earnings to 5%, compared to 10% or more under existing programs. This new option, called the SAVE plan, will leave some people with a monthly bill of $0.

Private student loans do not offer the right to an affordable repayment plan, which is a significant difference between the federal and private loan spaces, according to Yu.

Much lower interest rate not a guarantee

According to higher education expert Mark Kantrowitz, while many people refinance their federal student loans to obtain a lower interest rate, it may be challenging to achieve this goal at present.

According to Kantrowitz, refinancing rates are estimated to be between 5% and 11%.

Only borrowers with excellent credit scores above 800 are likely to benefit from refinancing since they are the ones who can secure a significantly lower interest rate, according to Kantrowitz.

Before making any move, borrowers should carefully consider the protections and possible forgiveness opportunities they may be giving up, advised the expert.