*UPDATE AS OF TUESDAY, DECEMBER 10, 2020
The federal student loan administrative forbearance period (dubbed the “freeze”) has been extended through January 31, 2021. This means you are not required to make payments until February 2021. If you wish, you may continue making payments at 0% interest.
Breathe in. Breathe out. We know there is a lot of uncertainty as the world faces the challenges and realities of COVID-19. While many of us are working remotely or facing job uncertainty, transferring our schooling online, and putting many aspects of our life on hold, the reality is that not everything can come to a full stop. Student loan debt reached another all-time high back in 2019 and many graduates are looking into options to repay their debt.
On top of the various repayment options available to borrowers, the government has been announcing new, short term but open-ended policies for federal student loan holders. There is a lot to digest, but there are ways you can bring some certainty to paying off your student loan debt.
Private vs. Federal Loans: Understanding Your Options
The two major categories of student loans available today are private student loans and federal student loans. Federal student loans are taken out through the government and comprise more than 90% of education debt, while private student loans are obtained through private financial institutions, such as banks and credit unions.
The federal government announced a pause on student loan interest as a response to Coronavirus on March 13. In essence, student loan interest will freeze, meaning interest will not accrue on certain loans until the policy is changed. In addition to pausing student loan interest, it was announced on Friday, March 20, that all federal student loan borrowers now have the option to suspend their monthly payments for at least the next 60 days. These rate reductions and payment suspensions only apply to federal loans, and therefore won’t have an impact on private student loans or loans that have been previously refinanced.
Prior to the announcement of federal loan interest freezes, the Federal Reserve cut the federal funds rate to 0 – 0.25%. While federal rates were recently cut, refinancing rates from private lenders have been the lowest that we have seen in nearly 10 years[BS1]. Private lenders are doing their part to offer relief as well, like student loan refinancing platform, LendKey, by offering emergency benefits as its network of lenders have responded with rate drops alongside the Fed. As of December 15th, 2020, fixed rates are as low as 2.95% APR and variable rates as low as 1.99% APR.
For borrowers of existing student loans, many lenders have begun making special options available to offer relief from the stress caused by COVID-19. As of today, most student loan refinancing companies have responded in some way to the crisis on their website. While these companies haven’t publicly posted their specific policies, they do have information available on their homepage along with contact information to speak with their specialists.
If you currently have private, federal, or both types of student loans, there are other relief options to consider, such as refinancing some, or all, of your student loans.
What exactly is Student Loan Refinancing?
When you refinance your student loans, you pay off your existing student loan(s) with a brand new one. This allows you to seek better interest rates, terms, or lower your monthly payment to better fit your budget. The new loan payment and interest rate will commonly be driven by your credit score, credit history, and income, as well as other factors that can vary by lender.
Refinancing is done through private lenders like banks and credit unions. If you have federal student loans and rely on their income-based repayment plans or are planning on qualifying for Public Student Loan Forgiveness, you may want to stick with your federal loans and consider a federal loan consolidation, which gives you one payment to manage but averages the rates of your existing loans so you don’t save any money in interest.
How Can Refinancing Help During This Crisis?
Many millennials, in particular, have discovered when they graduated that paying off their student loans wasn’t as simple as everyone made it sound. You may have to work a less lucrative job for a while before you’re able to get a high-paying career that corresponds with your major. You might even find that getting work in your field takes longer than you anticipated. Worse, you may have worked for a period of time in your industry but suffered a financial setback that left you struggling to meet your student loan payments each month.
Especially now, with many facing cutbacks in their hours, or losing employment completely, it could be a crucial time to reevaluate your financial situation. Explore your options, such as looking into federal benefits like income-based repayment, as well as seeking out options from private lenders. Savings matter, and having the opportunity to lower your interest rate or reduce your monthly payment now, could have a huge payoff down the line.
It’s important to remember that you still must be in good financial shape to refinance. Factors like credit score, debt-to-income ratio, or having a creditworthy cosigner will all play a role in your ability to qualify. Before refinancing, you may want to talk with your existing lender about whether or not they can work with you to lower your payments. Carefully consider whether you’ll stand to save money by refinancing. If so, refinancing may be a great move for you. On the contrary, if you have poor credit, already have great interest rates, can maintain a zero-interest federal loan or suspend federal loan payments for 60 days, refinancing might not be the best option at this time.
When to Consider Refinancing
- Your personal financial situation has changed. We stated earlier that refinancing is typically used by people who are in healthy financial shape. With that said, you may still find that current payments are challenging. If that’s the case and you have private loans, refinancing could be a good solution to lower your interest rate or lower your monthly payment. By selecting a longer repayment term, you’d be tolerating a potentially larger amount of total interest over the life of your loan to free up more cash flow now by lowering your monthly payments. If you only have federal loans, it likely doesn’t make sense to refinance right now until payments resume and interest begins accruing again.
- Existing loans can improve. Private student loans have nothing to lose by refinancing. If the rates you’re offered to refinance are lower than your existing private student loans, it probably makes sense to lock those in while rates are historically low. You may also have some variable rate loans and want to lock in a fixed rate instead for peace of mind that your payments won’t increase over time.
- You meet basic eligibility requirements. This means you have a good credit score, stable income, and debt-to-income ratio, already have or are about to graduate, and are a US citizen or permanent resident.
Reasons to Refi
So, should you refinance your student loans? While refinancing isn’t the only repayment option for borrowers, it certainly has its benefits. Let’s take a look at a few different reasons to refinance your student loans.
- Lower interest rates. When refinancing a loan, you have an opportunity to get a better interest rate, especially if you currently have loans with high-interest rates (above 7%). Lowering your interest rate can help you save money depending on the term you choose. If you’ve been out of school for a while and have used credit responsibly (e.g., you’ve made timely payments), your annual income and credit history are likely to have improved since you were a student. With improved credit and financial history, you may see a lower rate. When it comes to federal loans, refinancing may not be the right option until interest and payments resume.
Keep in mind that many factors go into determining what interest rate you may qualify for, including the current economic climate and prevailing interest rates. Right now, interest rates are the lowest they have been in nearly a decade, and graduates have access to great offers by lowering both their rate and payment. You may be able to refinance your student loans again through the same company if you find better rates in the future.
- Reduce monthly payments. As mentioned above, you can reduce your monthly payment by lowering your interest rate. You can also extend the life of the loan by refinancing for a longer-term. For example, if you have 10 years left on your loan, refinancing it to a 15-year loan will likely lower your monthly payment. Keep in mind that the longer you take to pay off a loan, the more you may end up paying in interest over time.
- Pay off your loan faster. Alternatively, you can also refinance your loan and shorten the term, for example from 10 years to 5 years. While this may mean higher monthly loan payments, you may save money on the interest you would have paid over a longer period of time. Plus, paying off your loan faster gives you the freedom and satisfaction of being student loan debt-free.
- Release a cosigner. If you previously had a cosigner on your private student loan, refinancing gives you the option to release this cosigner.
- Reduce hassle. Similar to consolidation, refinancing also involves combining multiple loans into one. One loan means the convenience of only one payment to keep track of and the same due date each month.
Still Need Help?
Do you still have questions or concerns? If you’re still interested in learning more about your options with student loans, check out the LendKey blog which includes infographics, calculators, and more.
We know this is a stressful and confusing time for many, especially when it comes to our financial health. Remember that we are all in this together and will get through it with the support and resources available to us. If you feel unsure of what steps to take next, lean on the advice of trusted advisors and educational sites to help guide you through. You’ve got this.
LendKey rates did not adjust because of the Fed cut and we are now seeing others increase their rates. [BS1] [BS1]
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