Should I Refinance Student Loans in an Economic Downturn?April 29, 2020
The COVID-19 outbreak has had a significant impact on the economy, causing many people to lose their jobs and struggle to make ends meet.
By Kat Tretina
While the Coronavirus Aid, Relief, and Economic Security (CARES) Act gave some relief to federal student loan borrowers — including suspending loan payments and waiving interest charges for six months — those provisions won’t last forever. Under the current legislation, the CARES Act protections will expire on September 30, 2020.
If you’re looking for a long-term solution for managing your debt, student loan refinancing is a popular strategy. But does it make sense during an economic downturn? Here’s what to consider.
Should I refinance student loans? 5 questions to ask first
Before moving forward with your refinancing application, ask yourself these five questions.
1. What kind of loans do you have?
What kind of loans you have will impact what protections and benefits are available to you.
If you have federal student loans, you may be eligible for protections under the CARES Act, meaning your payments are suspended until September 30, and interest charges are waived.
Since you don’t have to make payments and interest isn’t accruing, it may not make sense to refinance right now. Instead, it may be wiser to wait until the CARES Act provisions expire to refinance your debt.
However, not all student loans are eligible for the CARES Act benefits. Private student loans and some federal loans, such as Perkins Loans and commercially-owned FFEL Loans, don’t qualify for payment suspensions or interest waivers. If you have that kind of debt, refinancing right away can help you save money and pay down your loans.
2. How secure is your job?
During an economic downturn, the job market can become volatile. If you’re at risk of losing your job, it’s important to keep your federal loans where they are so you can take advantage of the CARES Act and federal forbearance and deferment protections.
If you have private loans, refinancing can actually be a good idea. When you refinance, you can move your loans to a new lender that offers more generous repayment options, such as longer repayment terms and financial hardship forbearance. For example, if you are unable to repay your loans because of a financial hardship or medical issue, ELFI may grant you forbearance for up to 12 months.
If your company is relatively secure, you can also encourage your employer to offer student loan repayment assistance to recruit and retain top talent. With ELFI for Business, companies can offer this benefit as part of their compensation packages and take advantage of the tax provisions in the CARES Act that benefit employers.
3. Do you have an emergency fund?
Refinancing your student loan debt can accelerate your debt repayment. If you make extra payments toward your loans, more of your payment will go toward the principal rather than interest, cutting months or even years off of your loan term.
However, putting extra cash toward your debt during a recession may not be the best course of action. If you don’t have a substantial emergency fund, you’re likely better off stashing your money into a savings account until you have at least three to six months’ worth of expenses saved.
Once you have a fully-funded emergency fund, then you can focus on paying down your debt.
4. Do you have good credit or a cosigner?
Refinancing rates are rapidly dropping, so you can dramatically reduce your interest rate when you refinance your student loans.
However, to qualify for the lowest rates, you’ll need to have excellent credit. If your credit is less-than-stellar, or if you don’t have an established credit history, you can still qualify for a loan and get a competitive interest rate by adding a cosigner to your loan application.
A cosigner can be a parent, relative, or even a good friend with a good credit score and stable income. They apply for the loan with you and agree to make payments if you fall behind. Because they’re backing you on the loan, there’s less risk to the lender, allowing you to get a lower interest rate than you’d get on your own.
5. What are your goals for refinancing?
When the economy is in decline, it’s essential that you’re very clear about your financial goals. Before refinancing your debt, think about what you want to accomplish. There are three main benefits of student loan refinancing:
- You can pay off your debt earlier: With a lower interest rate, more of your payments go toward the principal. If you stay consistent with your payments, you can pay off your student loans ahead of schedule, becoming debt-free sooner. During a recession, not having any debt is a major advantage.
- You can save money over the life of your loan: When you refinance your debt and qualify for a lower interest rate, you can save thousands over the length of your repayment term. You can use the money you save to pursue other financial goals, like investing or buying a home. Use the student loan refinance calculator to find out how much you can save.*
- You can reduce your minimum monthly payments: If your monthly payments are too high right now, refinancing can make them more manageable. By getting a lower interest rate or extending your repayment term, you can significantly reduce your minimum monthly payment and get more breathing room in your monthly budget.
Refinancing your student loans
Even though the country is going through a significant economic crisis, student loan refinancing can still be an effective way to manage your debt in certain situations. Before refinancing, carefully evaluate your situation and what protections are available for your loans to ensure it’s the right decision for you.
If you decide that refinancing makes sense, use the Find My Rate tool to get a rate quote.*
*Subject to credit approval. Terms and conditions apply.
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