Should You Refinance a Student Loan during the Pandemic?

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By Mark Kantrowitz

July 30, 2020

Should you refinance your student loans during the pandemic, given that interest rates are at or near record lows? The answer depends on whether the loans are federal student loans or private student loans. Borrowers of Federal Direct Student Loans should wait until after the payment pause and interest waiver ends. Other borrowers do not need to wait, but interest rates are unlikely to change by much over the next year. 

Wait until the Payment Pause Is Over for Federal Student Loans

Borrowers are not required to make any payments on certain federal student loans until September 30, 2020. The interest rate is also set to zero during this period, effectively freezing the loans. The loans will be exactly the same at the end of the payment pause as they were at the beginning.

The interest waiver will save borrowers hundreds or even thousands of dollars of interest on their student loans.

The payment pause and interest waiver applies only to federal student loans in the Direct Loan program and certain government-held loans from the FFEL program. It does not apply to commercially-held FFELP loans or private student loans. 

See also: Don’t Refinance Federal Student Loan During the COVID-19 Pandemic

The payment pause and interest waiver runs through December 31, 2020, unless Congress extends it.

Borrowers who are unemployed or struggling to repay their federal student loans should probably not refinance their federal loans until after the payment pause and interest waiver expires, and maybe not at all.

Federal student loans, including loans in the Direct Loan and FFEL programs, are also eligible for other forms of financial relief, such as:

If the borrower’s income is less than 150% of the poverty line, their loan payments are zero under an income-driven repayment plan. Deferments and forbearances for federal student loans are available for up to 3 years.

Thinking of putting loans in deferment? Use our Cost of Deferment Calculator to evaluates the impact of interest capitalization at the end of a deferment or forbearance on the monthly loan payment and the cost of the loan, assuming that the loan payments are re-amortized after the deferment or forbearance.

There are also loan discharge and student loan forgiveness options.

See also: Complete Guide to Student Loan Forgiveness

Generally, borrowers with older loans and excellent credit may be able to qualify for a lower interest rate through a private refinance, but would then lose those federal benefits mentioned above.

No Need to Wait for Refinancing Private Student Loans

Private student loan lenders are offering borrowers a special COVID-19 forbearance for 90 days upon request. This payment pause does not include an interest waiver. Borrowers can get the COVID-19 forbearance even after they refinance.

Thus, there is no reason why private loan borrowers should not refinance private student loans, if they can qualify for a lower interest rate. 

See also: Options for Pausing Private Student Loans During Coronavirus

Use our Loan Refinancing Calculator to see how much you can lower your monthly loan payments or total payments by refinancing your student loans into a new loan with a new interest rate and new repayment term.

Interest Rates Will Still Be Very Low If You Wait

Interest rates on new federal student loans for undergraduate students hit a record low of 2.75% for new loans disbursed on or after July 1, 2020. The new interest rates do not apply to existing loans, however. One cannot consolidate a federal loan to qualify for the new interest rates. 

Instead, the only way for borrowers of older federal student loans to take advantage of new lower interest rates is to refinance them into a private student loan. Although new interest rates on private student loans (which reset monthly or quarterly) aren’t quite as low as on new federal student loans, they are at or near historic lows for private student loans. 

Don’t worry that waiting a few months to refinance will cause you to miss out on a very low interest rate on your student loans. Low interest rates are likely to continue to be available at least through the end of the year and probably well into 2021. 

When refinancing into private student loans, borrowers should be careful to distinguish between fixed and variable interest rates. Given that interest rates are extraordinarily low, getting a fixed interest rate is probably the smartest option. Variable interest rates may be initially lower, but have nowhere to go but up. The only circumstance in which a variable rate is preferred should be when the borrower will pay off the loan in full before interest rates rise too much. 

The interest rate on a private student loan depends on the borrower’s credit score (and, if they are applying with a cosigner, the cosigner’s credit score). A higher credit score yields a lower interest rate. Lenders normally also look at the duration of the borrower’s employment and the borrower’s debt-to-income ratio. Some lenders are making accommodations if the borrower’s employment situation is disrupted on a temporary basis and they are expected to return to regular employment as the country reopens. 

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