Should you be refinancing your student loans now?

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With interest rates at record-breaking lows due to the COVID-19 crisis, it may seem like the perfect time to refinance your student loans. However, there’s more to refinancing than just securing a lower interest rate, especially given current loan relief options presented by the federal government. Whether you should refinance your student loans right now depends on the type of loan you have and your current financial situation.

What does refinancing my student loan mean?

When you refinance, you take out a new loan to pay back some or all of your student loan balance. You can refinance both private and federal student loans, but it generally only makes sense if the interest rate of the new loan is lower than your current interest rate.

Refinancing changes all of your loan terms and rates, since you’re essentially taking out a new loan. When refinancing, It’s important to shop around and compare multiple lenders to ensure that you’re being offered a competitive rate.

Who should refinance right now?

Whether refinancing makes sense depends on the type of loan you’ve borrowed. Rob Bertman, CFA, CFP and senior student loan adviser at Student Loan Planner, advises against refinancing your federal student loans right now.

Due to the recent student loan memorandum issued by President Trump, all student loan payments have been suspended until Dec. 31, 2020, and all interest is waived during that time for borrowers who continue to make payments. This means that it wouldn’t make sense to refinance federal student loans for the time being, says Bertman. Instead, you may consider continuing to make zero-interest payments on your loans or putting the money you would be paying into a savings account or emergency fund.

However, it’s a different story for those with private student loans. “Refinancing private student loans makes sense to take advantage of the savings you could get with locking in a lower rate,” says Bertman. If you can find a low fixed rate now, you could save thousands of dollars in interest over the life of the loan. “Be sure to shop around with multiple lenders to make sure you’re getting the best rate possible,” Bertman adds.

Pros of refinancing right now

Securing a lower interest rate and simplifying your payments are a few examples of why refinancing could be the right choice.

According to Brian Walsh, certified financial planner and manager of financial planning at SoFi, the right time to refinance is anytime you can adjust your repayment strategy to align with your goals. “At a high level I see three common goals: Reduce current payments, keep the payment the same while paying less interest and paying off the debt as quickly as possible.”

Another benefit to refinancing student loans is that it simplifies your financial life, says Walsh. Multiple payments can add unnecessary complexity to your personal finances, and simplifying your student loan payment — especially during the COVID-19 crisis — could be a great way to pay off those loans faster than you had anticipated.

Who should refinance right now:

  • Borrowers with private student loans.
  • Borrowers looking to simplify their student loan payments.

Cons of refinancing right now

Refinancing your student loans is a highly personal decision. “Your balance, interest rate and cash flow will factor into the decision,” says Walsh. However, if you are borrowing federal student loans, you may want to think twice. A major disadvantage of refinancing your student loans — especially right now — is that you forfeit your federal protections, like a grace period and federal repayment options.

Leslie Tayne, founder and head attorney at Tayne Law Group, says that “with all things considered, it’s probably not a good idea for most borrowers to refinance their federal student loans right now, but to pay what you can and reduce the principal balance.”

Right now, you may want to consider taking advantage of the forbearance period, advises Tayne, even if you have job security and excellent credit. This gives you a safety net in case your income changes unexpectedly before the forbearance period expires. If you refinance now, you won’t have the option to skip payments. Because of this, Tayne recommends waiting until the end of the year when the forbearance period expires.

Who shouldn’t refinance right now:

  • Federal student loan borrowers.
  • Borrowers who already have a low interest rate.

The bottom line

Whether you have federal or private student loans will determine whether it’s an ideal time to refinance your student loans. Generally, if you have private loans, you could benefit from refinancing during this period of rock-bottom interest rates. However, if you have federal loans, it’s likely best to wait until the period of administrative forbearance ends.

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