As borrowers wait to apply for student loan forgiveness, several debt servicers have used the opportunity since the cancellation announcement to tout private loan refinance options.
For instance, shortly after President Biden announced student loan forgiveness in late August, Navient sent an email that started out “Not sure if you need to refinance?” before making a passing reference to the forgiveness news. SoFi also sent out an email urging borrowers to “Refi your student loans now and save before rates rise” while also announcing the forgiveness.
Some lawmakers and advocates worry those marketing moves could confuse some borrowers who would become ineligible for cancellation if they refinance their federal loans into private ones. The issue was further compounded by a lack of detailed information coming from the Education Department after the announcement.
“We are hearing from borrowers who have received these emails and it is adding to an already confusing situation [as] borrowers often don't understand the difference between federal and private student loans,” Cody Hounanian, executive director at Student Debt Crisis Center (SDCC), told Yahoo Money. “Many borrowers have refinanced into a private student loan only to find out later that they no longer have access to federal programs. Now, the stakes are even higher. Borrowers who refinance into a private student loan now will not have access to the President's debt cancellation plan.”
An opportunity to push refinancing
In a Banking, Housing and Urban Affairs hearing last month, Sen. Elizabeth Warren (D-MA) called out student loan servicers for pushing refinancing that could render some borrowers’ loans ineligible for forgiveness.
“While families breathe a sigh of relief, corporations that made billions off a broken student loan system are now busily laying new traps in a shameless, last-ditch effort to try to line their pockets,” Warren said. “Navient, one of the world’s largest and worst loan servicers, is now leading the way. According to reports, immediately after the cancellation was announced, Navient sent multiple emails to borrowers encouraging them to refinance their federal loans under Navient’s private lender, NaviRefi, with the promise of lower interest rates.”
Navient provided the email it sent borrowers to Yahoo Money after the announcement. In it, the body of the email provides a comparison between federal and private student loans, but it only mentions the eligibility of forgiveness in a third footnote at the end of the email in smaller font.
“NaviRefi’s promotional emails, website (navirefi.com) and application and approval processes include clear, comprehensive and numerous statements designed to help borrowers understand the terms of private loans,” Paul Hartwick, director of corporate communications at Navient, told Yahoo Money in an emailed statement.
In SoFi’s email, the body does give equal billing to refinancing and the announcement of loan forgiveness after the header advertising refinancing. But, similar to Navient’s email, SoFi’s email only mentions how refinancing could make you ineligible for forgiveness in a footnote in smaller print.
Yahoo Money obtained the SoFi email from a borrower. SoFi confirmed the email was sent to borrowers, but did not provide any other response.
“The whole private refinance market deceives people into focusing only on interest rates and unknowingly giving up potential benefits, like cancellation, along with their political power as federal student debtors,” Sparky Abraham, legal strategist at Debt Collective, told Yahoo Money.
Broader pattern of behavior
The marketing efforts come as these servicers face scrutiny on how they handled other student loan relief.
Late last month, the Consumer Financial Protection Bureau (CFPB) released an examination report that showed servicers “illegally hampered borrowers’ access to federal student loan payment relief and cancellation programs” such as the income-driven repayment, public service loan forgiveness, and teacher loan forgiveness programs.
“Student debt cancellation is transformative and we must ensure that everyone eligible is able to access the debt relief programs offered by the federal government—period,” Rep. Ayanna Pressley (D-MA) told Yahoo Money in response to the CFPB report. “Servicers and lenders have a responsibility to provide accurate and timely information about cancellation programs and balance adjustments, and they must do away with harmful practices that prevent borrowers from accessing this relief.”
When federal loans are converted to private ones, borrowers lose certain consumer protections, the flexibility on repayment terms, and the ability for the loans to be canceled, Katherine McKay, associate director of the Financial Security Program at the Aspen Institute, told Yahoo Money. While the rates on federal student loans may be higher, they are fixed rates and not based on the borrower’s credit score.
“Borrowers may not know that information,” McKay said, “but lenders that offer student loan refinancing are not required to provide plain-language comparisons of their products to federal loans.”
Lack of information from government
Some of the borrower confusion could have been avoided if ED rolled out detailed guidance when the forgiveness was announced instead of telling borrowers to sign up for notifications on the Federal Student Aid website — which was hard to access for days as borrowers flocked to the site.
That void of details left loan servicers as one of the only sources of information for borrowers and has also created a breeding ground for loan forgiveness scams, which the ED had to address by issuing a press release on how to avoid.
“A series of decisions by FSA, has resulted in significant confusion for students and increased burden on postsecondary institutions,” the National Association of Student Financial Aid Administrators (NASFAA) said in a September 7 letter to the ED. “Worse, these major changes often came with little to no advance notice. Education Secretary Cardona declared in June 10 that FSA was already busy preparing for broad scale forgiveness and, yet, at the time of the announcement FSA had no answers to even simple implementation questions such as which loans would qualify for cancellation based on origination or disbursement date.”
The ED has so far provided a sprinkling of updates on which loans qualify for forgiveness and other eligibility questions. This week it provided a preview of the online forgiveness form borrowers will need to fill out, but offered no specific date for when the application will go live.
In the meantime to help borrowers, the SDCC is training over 600 ambassadors to help borrowers navigate the loan application process and get answers.
“We are focused on getting the word out to as many people as possible, hoping to reach those that are not receiving accurate information from their loan servicers or ED, face technological or communication barriers, and are generally distrusting of the system,” Hounanian said. “We are hearing from borrowers that servicers are dropping the ball, so helping get the word out through trusted messengers is critical.”
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda