Should you refinance student loans during the coronavirus pandemic?

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It can be a challenge to figure out the best way to manage your student loan in the best of times. During the COVID-19 pandemic, there are even more details to consider than usual.

On one hand, refinancing student loans may save money and help you eliminate debt faster. But taking out a new loan to combine your existing student loans isn’t the right move for every borrower.

Should you refinance your student loans during the COVID-19 pandemic?

There are a number of factors that could make refinancing your student loans a great idea or a bad one. And while the types of student loans you owe — federal or private — is likely the first consideration that comes to mind, you’ll want to dig a little deeper before you make such an important financial decision.

Most federal student loan payments are on pause

The Coronavirus Aid, Relief, and Economic Security (CARES) Act put payments and interest on pause for most federal student loan borrowers. Initially, this payment halt (formally called administrative forbearance) was in effect through September of 2020. Thanks to a recent extension by President Biden, most federal student loan borrowers don’t have to resume making payments until September 2021.

The COVID-19 payment and interest suspension applies to all ED-owned loans, including:

  • Direct Loans (nondefaulted and defaulted status).
  • FFEL Program Loans (nondefaulted and defaulted status).
  • Federal Perkins Loans (nondefaulted and defaulted status).
  • HEAL Loans (defaulted status).

If you have eligible federal student loans that are currently on a payment pause, refinancing would change your situation. Once you take out a new private loan, your lender will expect you to start making payments right away.

Student loan interest rates are low

Interest rates have dropped in the last year on many types of financing, including private student loans. If you can refinance your existing student loans into a low fixed interest rate, you could pay significantly less money in the long run — especially if your current interest rates are high.

Private student loan borrowers may want to refinance right away to take advantage of lower interest rates. But federal student loan borrowers would forfeit the coronavirus payment relief measures that are currently in place if they refinance now.

On a positive note, the current student loan interest rate forecast is encouraging. Experts don’t anticipate a major interest rate hike in 2021, so even if you hold off on refinancing your loans now, you may be able to secure an attractive rate if you decide to refinance your loans down the road.

Private (and some federal) student loan payments are still due

With private student loans, your lender still expects you to make your payments as scheduled. There’s no payment or interest pause in effect for the following types of federal loans either:

  • Federal Family Education Loans (if owned by commercial lender).
  • Perkins Loans (if held by the college you attended).

If you currently have outstanding loans that fall into any of the above categories, then refinancing might make sense. You can use a student loan refinance calculator to crunch the numbers and see how much a lower interest rate could save you.

Refinancing federal student loans takes away benefits

The immediate loss of coronavirus payment relief (aka administrative forbearance) is the biggest downside to refinancing federal student loans right now. But taking out a new private loan to pay off your government-backed student loans could cost you other benefits as well.

Some of the most notable federal student loan benefits you would forfeit by refinancing to a private loan are as follows:

It can be challenging to refinance student loans with bad credit

When you apply to refinance your student loans, the lender will check your credit report and score as part of the process. If your credit is in poor shape — for instance, if you’ve fallen behind on credit card payments due to the pandemic — you could have a hard time qualifying. And even if a lender approves your loan application with credit problems, you might not receive the most attractive interest rate or terms.

Working to improve your credit before you apply for a new loan may be helpful. But keep in mind that many private lenders offer a prequalification process. Prequalification lets you see if a lender is likely to approve you for a loan (and at what interest rate) without any negative impact on your credit score.

What other steps can you take if you’re having trouble making payments?

Refinancing your student loans has the potential to lower your monthly payment by securing you a lower interest rate, extending your repayment terms or both.

But there are also other options to lower your monthly student loan payment if you’re struggling due to the pandemic. In addition to refinancing, you might consider one of the following alternatives:

  • Apply for forbearance: Many private student loan lenders have begun offering deferment and forbearance options specific to the coronavirus pandemic. These options may be more generous than what the lender offers during normal circumstances. To find out what you may qualify for, contact your lender.
  • Ask for an adjusted repayment plan: Even if a lender doesn’t have an established forbearance program in place, it may be willing to temporarily adjust your payments. In many cases, a lender would rather work with you on creating a plan than let you default, so it’s always worth asking.

Next steps

Because interest rates are low, it’s worth considering whether you could benefit from refinancing your student loans. If you can reduce the interest rate on your private student loan debt, now might be a good time to refinance. But if you can’t secure a better interest rate, or if you’ll have to sacrifice valuable federal loan benefits, refinancing your student loans may not be the right move.

Just be sure not to rush into a decision. It’s important to take time to consider all of your options. Then, if you’re leaning toward a new loan, you should shop around to find the best student loan refinance rates available.

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Written by
Michelle Black
Contributing writer
Michelle Lambright Black is a credit expert with over 19 years of experience, a freelance writer and a certified credit expert witness. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others.
Edited by
Student loans editor