Here’s why you should reconsider refinancing federal student loans during the pandemic.
Why You Shouldn’t Refinance
You take out a new student loan with a private lender when you refinance. The new loan pays off and replaces your existing student loans (federal or private). Refinancing student loans can be an attractive option to combine and simplify student debt, to adjust loan payments or terms, and to potentially secure a lower student loan rate. But private lenders don’t offer the same protections you get with federal student loans. They won’t change repayment plans or pause payments. Refinancing will also mean losing out on student loan relief offered in response to the coronavirus pandemic.
Refinance Federal Student Loans, Lose CARES Act Relief
The CARES Act extends unprecedented student loan relief for federal student loan borrowers. Benefits to borrowers with federally owned student loans include administrative forbearance that automatically suspends payments. Forbearance has been extended multiple times, and was extended again on Nov. 22, 2022, with the exact end date yet to be determined. Forbearance applies to payment requirements for Public Service Loan Forgiveness, forgiveness offered through income-driven repayment plans, and student loan rehabilitation. All interest charges are suspended as well. No accruing interest means that your student loan balance won’t increase, and you won’t pay for this pause in payments. It can be a chance to pay down your principal or any previously accrued interest if you do choose to continue making payments during this time. With no interest and no payments, borrowers save by leaving their federally owned student loans as they are until all applicable deadlines expire.
Other Long-Term Benefits You’d Be Giving Up
The CARES Act has provided key student loan relief, but it didn’t cover all federal student loans. Some, including Federal Family Education Loans (FFEL) and Perkins loans, are guaranteed by the U.S. Department of Education but they’re owned by private lenders. The Department of Education announced on March 30, 2021, that it would grant the same waivers for FFEL that have been afforded to other federal student loans. That means 0% interest is due between March 13, 2020, through Dec. 31, 2022, and payments are paused until Dec. 31, 2022, as well. Any payments that were made can be refunded upon request, and any wages or tax refunds that were garnished will be returned. The loans will be restored to their current status. Credit bureaus will be notified to remove any delinquency reports from credit reports. You can still benefit from other federal student loan protections if your student loans aren’t eligible for coronavirus relief, or if student loan relief runs out.
Forbearance and Deferment
Many private lenders offer forbearance options to pause payments, but it’s not guaranteed protection as it is with federal student loans. Student loan servicers are directed to grant forbearance or deferment to assist borrowers in certain situations. Reasons for federal student loan deferment include job loss, financial hardship, a return to school, or active military service. A student loan forbearance is an option to borrowers and can be granted to ease financial hardship, job loss or income drop, medical expenses, and other situations.
Alternative Repayment Plans
A refinanced private student loan is locked into a set repayment schedule. The only way to change your monthly payments is to refinance yet again. But borrowers can request a different federal student loan repayment plan at any time. One option for struggling borrowers is an income-driven repayment plan, such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). All of these are designed to keep your monthly payments affordable, and they offer forgiveness of any remaining balances after 20 to 25 years.
Federal Student Loan Forgiveness
The last benefit to consider is federal student loan forgiveness. Federal programs such as Public Service Loan Forgiveness and Teacher Loan Forgiveness will cancel a portion of student debt if the borrower meets employment and other eligibility requirements. Student loans can also be canceled if the borrower dies or is permanently disabled, and in some cases of school misconduct or closure.
Biden Implemented More Federal Student Loan Relief
During his campaign, President Joe Biden proposed several plans to help borrowers with student loan debt. In August 2022, some of it came true. On Aug. 24, 2022, Biden announced the cancellation of $10,000 of federal student loan debt for eligible borrowers, and $20,000 for federal Pell Grant recipients. Biden also proposed a new plan for IDR plans. The plan would cap monthly payments at 5% of your monthly income. After 10 years, whatever remaining balance you have would be eliminated if the original loan balance was $12,000 or less.
The Bottom Line
No one can predict exactly what will happen with federal student loan policy in the coming years. But federal student loans already offer robust protections and options to borrowers no matter what happens in the realm of student loan policy. It may be worth passing on student loan refinancing in favor of access to federal student loan options in uncertain financial times like these, such as forbearance, deferment, or income-driven repayment.
