Around here, we field a lot of questions about student loans. There seems to be an endless amount to know in this space. It’s always our goal to always be learning as much as we can about loan types, repayment options, and opportunities for forgiveness. One of the most common questions we receive is whether a borrower should refinance their student loans.
Just weeks ago, the CARES Act was signed into law. As a result, some student loans can be placed on administrative forbearance until September 30th. This lack of required payment is only available on loans held by the Department of Education. If your loans are owned by the institution you attended or a private company your student loan payments aren’t included in this legislation.
If you’re unsure if your loans qualify for forbearance you need to communicate with your loan servicer. Your servicer is the authority over your loans. If you aren’t sure who services your loans you can log in to your student aid account to find out.
This administrative forbearance is one of the benefits of having federal vs private student loans. If you’re unemployed as a result of COVID-19 this benefit has a value to you beyond the dollars saved by the lack of monthly payment. The relief brought to many during this time of uncertainty is immeasurable. If you want to refinance your student loans you need to take these intangible benefits into account.
Federal student loans have many benefits not guaranteed by private lenders. If you have a reduction or loss of income you can apply for an income driven repayment plan or a temporary forbearance. This flexibility can help bridge the gap between income and expenses if you are experiencing some instability regarding your income. So if you’re considering refinancing your student loans, first ask yourself why. Most of the time someone is looking to refinance for two reasons:
- They want a lower interest rate.
- They want to consolidate their loans into one monthly payment.
There are arguments to be made for and against these primary goals.
Let’s start with the simplicity of payments.
We hear this as an argument often. “If I only had one payment it would be easier to keep up with this repayment schedule.” Though we can sympathize with the wish to have fewer obligations we can’t agree with the logic. By consolidating the debt you’re not truly eliminating an obligation, you are shifting your liabilities, which is not the same thing. If you’re trying to eliminate a creditor there should be a long term financial benefit as well.
Enter the next argument for refinancing: the desire to lower your interest rate.
To know if you can refinance for a lower interest rate you first need to understand your interest rates. Yes, that’s plural. Your interest rates. If you have federal student loans you likely have several different interest rates as rates change annually. If you have an offer for a consolidation make sure you aren’t including loans with a rate lower than your offer. If you do receive an offer from a private lender lower than your federal rate you need to know the total dollars saved. We really like to use PowerPay.org to evaluate savings over the lifetime of the loan. You can use the calculator on the Power Pay website to see the cost over the lifetime for your current rate and then for your new offer. Once you establish how much you’ll save in interest you’ll weigh that against the intrinsic value of the protections offered by federal loans. Only you can decide if the savings outweigh the benefit of possible flexibility.
As we’re constantly being told, these are unprecedented times. Hopefully this is the only time during your repayment we’re involved in a global pandemic. Even though it’s unlikely we’ll again see this mass forbearance it doesn’t mean you won’t be in a position where you need to reduce your payment. Though we cannot place a dollar value on some of the flexibility with federal student loans, it’s important to understand these benefits are available before you make the decision to refinance.
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.