Covid-19 has had a profound impact on many aspects of our lives. Managing student loans is no exception.
The fast-changing economic conditions have also had a significant influence on the student loan refinance process. Due to these changes, many borrowers may want to delay refinancing their student loans, as it could prove to be a mistake. In some limited circumstances, some borrowers should consider a refinance as soon as possible.
Now is a Bad Time to Mess with Federal Loans
The majority of student debt in the United States is owned by the federal government. Owing money to the federal government instead of a private lender can be beneficial in ordinary situations. During this particular financial and health crisis, this benefit is magnified for three critical reasons:
- The standard federal protections will help many borrowers. One of the best aspects of federal student loans is the availability of income-driven repayment (IDR) plans. The IDR plans allow borrowers to make payments based upon what they can afford, rather than how much they borrowed. For borrowers with large debts or who recently lost their job, this protection is huge. It ensures that a long period of unemployment means that borrowers won’t have to spend any money on their federal student loans, and it means that there is no risk of delinquency or default for the unemployed. While there are many legitimate grips about the federal student loan system, the IDR plans are far superior to the options available from private lenders.
- The government has frozen student loan interest rates indefinitely for most borrowers. In response to the Coronavirus, President Trump has already declared that borrowers will not be charged interest on their student loans. Borrowers may still be required to make payments, but the government will not be charging any additional interest as of March 13, 2020. This interest freeze is set to continue indefinitely, and realistically, the earliest we could see it ending would be November or December of 2020.
- More relief could be on the way. Senate Democrats have released a proposal that would suspend all student loan payments during the duration of the Covid-19 outbreak and cancel $10,000 of debt for all federal borrowers.
Generally speaking, when borrowers refinance their federal loans with a private lender, it is to secure lower payments or get a lower interest rate. For the time being, it will be tough for any private lender to compete with the federal perks and protections offered on government loans.
Once the economy and job market return to stability, more borrowers should consider refinancing at a lower interest rate. However, given that the Secretary of the Treasury recently said we could be looking 20% unemployment rates, assuming job security over the next year might be a mistake. When job security is a concern, borrowers should stick with federal loans.
Things are different for borrowers stuck with private student loans.
Many Private Loans Should be Refinanced Immediately
Not all borrowers can qualify to refinance their student loans, and not all borrowers are able to get a lower interest rate.
However, borrowers with a good job and a solid credit score should very seriously explore refinancing their high-interest private loans.
Procrastination on a private refinance could be expensive in the current economy.
- Lender rates are all over the place. Covid-19 has put the economy in chaos, and student loan refinance lenders have not been immune to the effects of the virus. This site has been tracking refinance rates dating back to 2013, and this is by far the most rate movement we have ever seen in a short period. Some lenders are rapidly raising rates while others remain near record lows.
- Interest rates may go up. Thus far, investors have sold off assets like stocks and bonds, looking for the security of cash. If this trend continues, student loan borrowers will see higher interest rates on refinance loans. This is because higher interest rates will be necessary to entice investors to buy the loans.
- Borrowers could lose their job. Those who are unemployed will not be able to get approved for a refinance loan. Anyone vulnerable to losing their job should seriously consider a longer repayment period to get payments as low as possible. Selecting a 20-year refinance loan doesn’t commit a borrower to taking 20 years to pay off the loan because there is no early payment penalty. However, it does give borrowers the flexibility of low minimum payments.
Some might argue that waiting for interest rates to drop due to the current economic conditions is the best approach. While that might be true in the case of a mortgage refi where the transaction can cost thousands of dollars, there is almost no harm in refinancing student loans multiple times. Savvy borrowers can lock in the best choice for their current circumstances, and then if things change for the better, opt for a new loan.
Student Loan Refinance Strategy During Covid-19
Most borrowers will want to leave their federal loans untouched. On the private loan side of the equation, locking in better terms is probably the best approach. Borrowers will also benefit only refinancing the private loans that are actually improved by a refi. In many cases, a borrower may choose not to refinance their low-interest loans and opt only to refinance the loans that have higher rates.
We have always advocated for borrowers to shop around because all lenders use different formulas for determining who they will approve and what rate they will offer. The recent economic turmoil has made predicting what lender will offer the best rate even more difficult. As a result, borrowers should plan on checking rates with at least five different refinance companies to find the best deal.
Finally, when selecting a repayment plan, borrowers should play it safe and opt for more extended repayment periods. Five-year loans have the lowest interest rates, but these loans also carry the highest monthly payments. In a recession, flexibility is critical, and having a lower minimum payment means maximum flexibility. Be sure to commit to a new loan that will be easier to maintain. Borrowers can always pay extra if they want, but there are very few ways to get lower payments if things get ugly.
While there are exceptions to every rule, the vast majority of borrowers will want to heed two simple rules when it comes to refinancing during the era of social distancing.
- Don’t refinance federal student loans.
- Lock in lower interest rates and/or payments with private loans if you can.
Those that are looking to refi can learn more about the process and the lenders in the market on our student loan refi page.