Refinancing Student Loans During COVID-19
It can be difficult to find the best way to manage your student loan in a timely manner. During the COVID-19 pandemic, there are even more details to consider than usual.
Firstly, refinance student loans can save money and help you get rid of debt faster. But taking out a new loan to combine your existing student loans is not the right decision for all borrowers.
Should You Refinance Your Student Loans During The COVID-19 Pandemic?
There are a number of factors that can make refinancing your student loans a good or bad idea. And although the types of student loans you owe (federal or private – is probably the first consideration that comes to mind, you’ll want to dig a little deeper before making such an important financial decision.
Most Federal Student Loan Payments Are Paused
The CARES (Coronavirus Aid, Relief, and Economic Security) law has suspended payments and interest for most federal student loan borrowers. Initially, this suspension of payment (formerly called administrative abstention) was in effect until September 2020. Thanks to a recent extension According to President Biden, most federal student loan borrowers do not have to resume their payments until September 2021.
The COVID-19 payment and interest suspension applies to all loans held by ED, including:
- Direct loans (non-defaulting and defaulting status).
- FFEL program loans (non-defaulting and defaulting status).
- Federal Perkins Loans (non-defaulting and defaulting status).
- HEAL Loans (default status).
If you have eligible federal student loans that are currently on payment break, refinancing would change your situation. Once you take out a new private loan, your lender will expect you to start making payments immediately.
Student loan interest rates are low
Interest rates have fallen over the past year on many types of financing, including private student loans. If you can refinance your existing student loans with a low fixed interest rate, you could be paying a lot less money in the long run, especially if your current interest rates are high.
Private student loan borrowers may want to refinance immediately to take advantage of lower interest rates. But federal student loan borrowers would forgo the coronavirus payment relief measures that are currently in place if they refinance now.
On a positive note, the current student loan interest rate forecast is encouraging. Experts don’t predict a major interest rate hike in 2021, so even if you delay refinancing your loans now, you may be able to get an attractive rate if you decide to refinance your loans later.
Private (and some federal) student loan payments are still due
With private student loans, your lender always expects you to make your payments as scheduled. There is also no break in payment or interest for the following types of federal loans:
- Federal family education loans (if owned by a commercial lender).
- Perkins loans (if held by the college you attended).
If you currently have outstanding loans that fall into any of the above categories, refinancing may be a good idea. You can use a student loan refinance calculator to calculate the numbers and see how much a lower interest rate could save you.
Refinancing Federal Student Loans Removes Benefits
The immediate loss of coronavirus payment relief (aka administrative forbearance) is the biggest downside to refinancing federal student loans right now. But taking out a new private loan to pay off your government-guaranteed student loans could cost you other benefits as well.
Some of the most notable benefits of federal student loans that you would lose by refinancing a private loan are:
It Can Be Difficult To Refinance Student Loans With Bad Credit
When you apply to refinance your student loans, the lender will check your credit report and score as part of the process. If your credit is in bad shape – for example, if you’ve fallen behind on credit card payments due to the pandemic – you might have a hard time qualifying. And even if a lender approves your loan application with credit problems, you may not receive the most attractive interest rate or terms.
Working at improve your credit before applying for a new loan can be helpful. But keep in mind that many private lenders offer a prequalification process. Prequalification allows you to see if a lender is likely to approve you for a loan (and at what interest rate) without any negative impact on your credit score.
What other steps can you take if you are having difficulty making payments?
Refinancing your student loans has the potential to lower your monthly payment by guaranteeing you a lower interest rate, extending your repayment terms, or both.
But there are also other options to lower your monthly student loan payment if you are having difficulty due to the pandemic. In addition to refinancing, you can consider one of the following alternatives:
- Submit an abstention request: Many private student loan lenders have started offering adjournment and abstention options specific to the coronavirus pandemic. These options may be more generous than those offered by the lender under normal circumstances. To find out what you may be eligible for, contact your lender.
- Request an adjusted repayment plan: Even if a lender doesn’t have a forbearance program in place, they may be willing to temporarily adjust your payments. In many cases, a lender would rather work with you to create a plan rather than leave you in default, so it’s always worth asking.
Since interest rates are low, it is worth considering whether you could benefit from refinancing your student loans. If you can lower the interest rate on your private student loan debt, it might be a good time to refinance. But if you can’t get a better interest rate, or if you have to sacrifice valuable federal loan benefits, refinancing your student loans might not be the right decision.
Just make sure you don’t rush into a decision. It is important to take the time to consider all of your options. Then, if you are looking for a new loan, you should shop around for the best student loan refinance rates available.