We’re living in uncertain times amidst the COVID-19 pandemic, so it’s good to be thorough as you evaluate what personal financial moves to make.
If you’re a student loan borrower, you’ve probably wondered, should I refinance student loans during the coronavirus pandemic?
The short answer is this: don’t refinance your federal student loans but try to refinance your private student loans.
For the long answer, keep reading. We’ll explain why now is a bad time to refinance your federal loans but a great time to refinance your private ones.
Now Is Not the Time to Refinance Federal Student Loans
Refinancing federal loans always requires some extra considerations because these loans come with many federal benefits. For example, federal borrowers have access to income-driven repayment plans, loan forgiveness, the Public Service Loan Forgiveness Program, academic deferment, and death and disability discharge.
With the coronavirus at play, borrowers have even more to consider.
Here are three reasons why you shouldn’t refinance federal student loans during the coronavirus:
Federal Student Loan Payments are Suspended
Many borrowers refinance to lower their monthly payments. Thanks to the CARES Act, there’s a payment pause on all eligible federal student debt backed by the Department of Education. Borrowers don’t owe anything on their federal student loans until at least January 1, 2021.
Refinancing can’t get your monthly payment lower than $0 per month.
Federal Loans aren’t Accruing Interest
Borrowers also refinance student debt to lower its interest rate, reducing the overall cost of the loan.
The CARES Act dropped interest rates on all qualifying federal educational loans to 0% through December 31, 2020. A zero percent refinance rate means two things:
- Your loan balance is not growing
- Any payments you make (assuming you don’t owe any outstanding interest) go directly on principal, lowering your loan balance
Refinancing won’t get you a 0% interest rate.
Biden Wants to Cancel Some Student Debt
Not only are we in the middle of the COVID-19 pandemic, but we’re also in the middle of the presidential election.
Joe Biden’s campaign platform includes widespread student debt cancellation, starting with $10,000 in federal student loan cancellation as a coronavirus relief measure.
Privately refinancing your government loans would disqualify you from any federal student loan cancellation or forgiveness.
We don’t know if Biden will win the election or if he does win, when if ever he would cancel the debt. However, we should have a clearer picture before the current coronavirus student loan relief measures expire at the end of the year. In the meantime, it’s best not to refinance your federal student debt.
It’s a Good Time to Refinance Private Student Loans
You shouldn’t refinance your federal loans right now, but you should consider refinancing your private loans. Not everyone will qualify for refinancing, but now’s a great time to try.
Here are three reasons why you should refinance private student loans during the coronavirus pandemic:
Interest Rates are Low
In September, the Federal Reserve announced it would keep the federal funds rate at 0 to 0.25 percent until labor market conditions improve. Private lenders use that rate as a benchmark when setting their own rates, which is good news for borrowers.
Refinance rates are low. Borrowers with a steady income and excellent credit have the best shot at being approved for the lowest rates, especially if they’re refinancing to a shorter loan term.
If that’s not you, consider adding a creditworthy cosigner. A cosigner’s strong credit score can help you snag the best rates. Prioritize applying to refinance lenders with cosigner release.
You Can Secure Borrower Protections
Does your current lender offer economic hardship or unemployment forbearance? What about academic deferment or total and permanent disability discharge?
If your lender isn’t offering you the above protections, you need a new lender. Refinancing with one of the top student loan refinance companies gives you access to financial relief during times of hardship.
It Offers Flexibility in Unpredictable Times
Everyone’s facing unprecedented situations due to the coronavirus pandemic.
Even if you’re still employed, you might be stretched financially for other reasons. Maybe your job is secure, but your partner lost theirs. Perhaps your monthly childcare expenses have skyrocketed. Maybe you’re facing unexpected medical expenses.
Whatever is happening, refinancing can help you make more room in your budget.
Securing a lower interest rate and/or switching to a longer loan term can lower your monthly payments. A longer loan term would increase the overall cost of your loan, but that might be worth it for the payment flexibility. Plus, you can always make additional payments to pay down the loan faster.
Get Started with Refinancing Your Student Loans Today
Here’s a brief guide for student loan borrowers interested in refinancing student loans during the coronavirus pandemic.
1. Determine Why You’re Refinancing
People tend to refinance because they want:
- To save money
- A lower interest rate
- Lower monthly payments
- Better service and borrower protections
- To pay off their loans faster
- A single location to make payments
Why do you want to refinance? Determining the reason will help you as you evaluate potential refinance deals.
2. Read Up on Student Loan Refinancing Mistakes
Refinancing isn’t something to do on a whim, especially if it could increase your monthly payment during an economic crisis. Read about and carefully consider The Top 11 Student Loan Refinancing Mistakes so that you make an informed decision about whether or not to refinance.
3. Determine Which Private Student Loans to Refinance
You may not want to refinance all of your private student debt. For example, if you have commercially held FFEL or Perkins Loans, you could consolidate with a Direct Consolidation Loan instead. The new Direct Consolidation loan would be eligible for coronavirus student loan relief measures in the CARES Act.
Speak to your loan servicer if you want to learn more about how federal consolidation would work for you. Once the payment pause ends in January, it’s possible that a Direct Consolidation loan would have a higher interest rate than what you have now.
4. Get Rate Estimates from Different Refinancing Lenders
Many private student refinance lenders, including those we partner with, run a soft credit check for preapproval. This won’t affect your credit score, and it will give you a fairly accurate rate estimate in minutes. Pick the refinance lenders you’re interested in and see what rates you get.
LendKey is a great place to start your search. This online marketplace pairs borrowers with community banks and credit unions. Plus, it offers cosigner release—a major perk if you need a cosigner.
5. Run the Numbers
Next, you need to compare your refinance deals to your current private loans to see if it’s a good deal. This requires two steps.
First, Calculate Weighted Average Interest Rate
The weighted average interest rate is more than just the average interest rate of all of the debt you want to refinance. It also accounts for each loan’s amount.
Use our weighted average interest rate calculator to help.
Next, Use the Student Refinance Calculator
Our student loan refinancing calculator compares your existing loan to your refinance loan. For current loan info, plug in the total amount of debt you’re refinancing along with the weighted average interest rate. For the new loan info, insert your refinance loan deals one at a time.
Compare each one to your current loan to see which deal will help you meet your refinance goals. The calculator will compare total interest paid, monthly payment, interest rate, and loan term, showing you savings for each category.
It’s harder to compare loans with variable interest rates because the interest rate will change over time. That makes variable rates a riskier choice, even if they start out lower. Learn more about choosing between variable and fixed-rate student loan refinance products here.
6. Decide Which Refinance Deal is Right For You and Finalize the Application
Weigh your options and determine which refinanced loan—if any—is right for you.
Beyond just comparing the numbers, you should also consider the lender’s special benefits and borrower protections. For example, if you’re unsure about your job’s stability, going with a lender that offers a longer period of economic hardship forbearance might make sense for you. If you need a cosigner, prioritize refinancing lenders with cosigner release.
Above all, make sure the refinanced loan you land on will actually help you achieve your financial goals. If it won’t, consider adding a cosigner to your application, improving your credit score, or getting rates from other companies.
Finals Thoughts on Should I Refinance Student Loans During the Coronavirus Pandemic?
Federal borrowers should not refinance federal debt during the COVID-19 pandemic. With private student debt, it depends. Rates are great right now, but you’ll only get the lowest rates if you or your cosigner have an excellent credit score. Adding a creditworthy cosigner can help. Of course, even without the lowest rates, private refinancing can also provide other forms of relief during the pandemic like a lowered monthly payment or extra borrower protections.
Learn more about student loans and the coronavirus:
Student Loan Forgiveness: Coronavirus Edition
Student Loan Grace and Forbearance Coronavirus Relief: What You Should Know
Tips on Paying Student Loans During Coronavirus for All Borrowers
Which Student Loans are Covered By the CARES Act?
Will the Government Extend The Grace Period Because of Coronavirus?
How Coronavirus Impacts Parent Student Loans – What Borrowers Need to Know
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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