Should I Do a Student Loan Refinance
Don’t Do a Student Loan Refinance During Covid-19
Interest rates have been dropping on private student loans the past several months, leading borrowers to consider a refinance, as one way to reduce their overall loan costs. That may be fine for a private loan borrower, but for someone who has federal student loans…a big mistake.
It’s tempting to consider a student loan refinance, especially with the coronavirus taking its toll. But just the opposite is true for those with federal student loans. For one, you lose the basic federal protections that were in place for quite some time.
The second reason to not do a student loan refinance, is that you lose other protections and student loan relief that is provided in the CARES Act. Under this ACT, you now have forbearance on all payments through December 31, 2020.
The White House, and both houses of government are still arguing on the next stimulus bill, and aren’t even close to an agreement. Don’t be surprised if you see more relief for federal student loan borrowers by the end of this year.
For that reason alone, it might be in your best interest to wait it out and see what they come up with. Refinance now and all of your federal protections and benefits from the CARES Act will disappear.
This is not a good time to do a student loan refinance
Essentially, if you do a student loan refinance, this is what happens: You submit an application to a private lender for a new student loan, high enough to repay all of your existing student loans. If the bank approves your loan, you now have one loan instead of several that you had before.
Having one private loan makes it easier to manage, plus you have the option to adjust terms and the loan payment at the inception of the loan. At this time, you would also be able to have a lower rate of interest as well. But this is where the benefits cease.
Private lenders aren’t able to offer you the same protections and benefits that you have with a federal student loan. These include being able to change your repayment plan or even pausing your payments, not to mention loan forgiveness too.
In addition, if your credit score isn’t good, or maybe the lack of a credit score, a private lender will request a co-signer for your loan. This means that if you don’t repay your loan, the lender will come after the co-signer, and make him pay.
You lose the CARES Act relief if you refinance your federal student loans
The new CARES Act that was signed into law earlier this year provided unprecedented relief to federal student loan borrowers. The first is a suspension of loan payments until December 31, 2020.
Usually on a forbearance, interest on the loan continues to accrue and increases the balance due. On this one, all interest charges are suspended for the same period. That means your loan balance won’t increase.
If you have the funds, this is a good time to make extra payments because all of the payment will go to reducing the principal balance.
You also have forbearance on the requirement for payments on Public Service Loan Forgiveness, plus income driven repayment plans. It also includes student loan rehabilitation.
Relief provided by the CARES Act was so substantial and broad that a couple of private lenders, Citizens Bank and SoFi advised borrowers seeking a refinance, to consider the benefits before they decided to refinance.
Without the required interest plus no payment option, borrowers will save by simply keeping their federal student loans the way they are until January 1, 2021.
Some other long term benefits you’ll lose
Even though the CARES Act provided important relief to borrowers with federal student loans, not all types of federal student loans are covered. Some of these, primarily Perkins Loans and FFEL loans, have the Department of Education guarantees, however, they are owned by private lenders.
If your student loans don’t qualify for Covid-19 relief under the CARES Act, or even if the relief expires and is not extended, there are other federal student loan protections available. If you do a student loan refinance, those protections will be gone, and you may very well need them.
Deferment and Forbearance
It’s true that some private student loan lenders offer options to pause your loan payments, but that’s not guaranteed. They can change that any time they please. If you have a federal loan, it will not be changed. The servicers of federal student loans must grant a deferment or a forbearance to help the borrower, when they are directed to by the DOE.
There are a number of reasons that qualify for a deferment such as financial hardship, loss of a job, active duty in the military, and returning to school. The option for forbearance to a borrower can include a loss of job, a drop in income, medical expenses, financial hardship, plus a few other situations.
Alternative plans of repayment
When you refinance a private student loan, the loan is locked into a certain repayment schedule. If you want or need to change those terms, you must do a refinance all over again. On a federal student loan, the borrower can request a different repayment plan at ant time without all the hassle.
If the borrower of a federal student loan is struggling financially, a good option is the income driven plan of repayment. Those are Pay as You Earn (PAYE) and the Revised Pay as You Earn (REPAYE). These plans are all designed to make your monthly payment affordable. Plus, they can offer loan forgiveness of the balance after 20 to 25 years.
Forgiveness of federal student loans
Another important benefit of federal student loans is that some portion of the loan can be forgiven under certain conditions. With the Public Service Loan Forgiveness and also the Teacher Loan Forgiveness, a certain portion of the loan debt will be forgiven (cancelled), as long as the borrower fulfills certain employment & eligibility requirements.
Should the borrower die or become permanently disabled, their loans can be cancelled. There have been cases where the school was found to be guilty of misconduct or closed, and these types of loans were forgiven.
Again, if you do a student loan refinance, and have a private loan, you don’t have these guarantees, and you’re stuck with them.
The CARES Act might be bringing more federal student loan relief
We’re in a presidential election year, so there are many proposals flying around. The wise thing to do is to wait and see before considering a student loan refinance. The CARES Act provided much relief for federal student loans, and both parties are offering more relief.
At the present time, we have the HEALS Act and the HEROES Act being worked on. Each political party is promoting one, but the HEROES Act bill, so far, includes an extension of the forbearance of payments as well as interest, to September 30, 2021.
It’s impossible to accurately predict what may happen to the policy on federal student loans in the coming months. But, no matter what, the protections offered by the current federal student loan program is very good.
Due to the uncertainty at the present time, it may be a wise decision to wait and see what may come out of the two bills currently being hashed out in the political arena. This might not be a good time to do a student loan refinance and give up the loan options like deferment, forbearance, and income driven repayment plans.