Is Now a Good Time to Refinance my Student Loans?

April 13, 2020 Human Investing

This will probably take place in Animal Crossing this year

This goes out to all those who hold part of the $1.6 trillion in student loan debt in the United States. This debt has the power to ignite in us fear, uncertainty, anxiety, and hopelessness. If you’re like me, at any given moment you are subconsciously trying to scheme out some way to make it better – whether it be refinancing, making extra payments when possible, seeing if you’re eligible for forgiveness, or just praying for a miracle. Given the increased levels of anxiety world-wide during this pandemic, I’m hoping that this information will provide a little bit of relief to your worries, even for a short window of time, as it has done for me.

If you’re eligible for relief, consider waiting to refinance

If you have been thinking about taking advantage of the low interest rates and refinancing or consolidating your student loans, you may want to hold off according to Justin Kribs, MS, CFP; Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc.

Last month, the US Department of Education announced student loan relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Refinancing your federal loans now with a private loan lender will waive all the new benefits from this relief, including the temporary 0% interest rate on federally held loans and suspension of payments. These federal benefits are most likely something you don’t want to miss out on.

Here’s the student loan relief per the CARES Act

Loans Eligible for Relief Benefits

Perkins Loans, Federal Family Education Loans, and Parent Plus Loans

Loans NOT Eligible for Relief Benefits

Private loans (e.g. bank & credit union loans)
Any loan not owned by the U.S. Department of Education

CARES Act - Benefits Offered to Borrowers
(In Effect 3/13/20 through 9/30/20)

Forebearance/suspension of payments
Loan payments are suspended for federal loans and no interest will accrue during the six-month suspension
Note: According to the CARES Act, the six-month window of suspended payments begins automatically, but it is recommended to confirm with your loan servicer to ensure they are suspending payments.
Interest rate elimination
Interest rates are reduced to 0% on all FD and FFELP loans
Note: It is important to note that FFELP loans that are owned by a bank, credit union or other lender are not eligible for the 0% interest rate.
Public service loan forgiveness
Suspended payment months continue count towards the loan forgiveness programs. As long as you are working, you do not need to make payments to continue to qualify.

Next steps

Defer student loan payments
If you’re eligible: Contact your lender and request or confirm a suspension of payments (this may have started automatically).
If you’re non-eligible: Call your private lender ASAP to see what options they offer to suspend, reduce, or pause payments and/or waive late fees – These will not be offered if you do not reach out. Keep in mind that each institution has its own guidelines for payments and late fees. Look here for a list of banks providing information and resources on Coronavirus relief
Make extra payments if you can
If you have extra cashflow, now is a really good time to take advantage of the 6-month, 0% interest benefit period. During this 6-month period, all your payments will pay down principal (and any interest that accrued prior to March 13th), putting you further ahead in the long run. You can make extra payments on your lender’s site at any time.
Note: Be sure to select “Do Not Advance the Due Date,” otherwise your lender will apply your payment to future payments rather than counting them as additional payments. There is usually an option to make this selection on the “pay now” page.

What if I want to refinance after the relief ENDS?

Since the CARES Act 0% interest is a short-term benefit, you may still want to consider re-financing to leverage a lower, long-term rate.

Are you a good candidate to refinance?
A person with stable income and a higher income to debt ratio may be a good candidate for refinancing. “A person with unpredictable income should probably steer away from refinancing,” says Justin Kribs, since private loans do not generally offer the same loan payment flexibility that is offered with federal loans.

What are your goals?
Shorter Loan-Term Length: For someone with excess cashflow to increase monthly payments and who is looking to pay off their loans as soon as possible, refinancing may offer a shorter term-length for your loan.

Lower Payments: For someone looking to free up some current cashflow by paying less on their loans each month, the reduced interest rate of a refinanced loan may offer a lower monthly payment.

This student loan calculator is a great resource to understand the impact of a refinance on your loan amortization (showing the payments split between principal & interest during your entire loan term length) and help determine if a lower interest rate will help you accomplish your goals.

How will you choose a private loan lender?
Client Experience: How are you being treated on the other end of the phone? Or on the other end of that email? Justin Kribs argues that this is one of the first things to look for when comparing lending companies.

Flexibility is Key: What types of assistance do they offer in times of hardship? Keep in mind that Private Loan Lenders do not offer the same assistance as Federal Loan Servicers (e.g. Income Based Plans, Forbearance, etc.). If this sort of flexibility is important to you, make sure to be clear when asking what benefits they will offer you.

Questions to ask: