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- debtors that took out federal student loans with greater prices many years back may consider refinancing to save money while prices are low.
- But, experts agree that it is not the time to refinance. Federal pupil loans are now in forbearance, and no payments are expected until September 30.
- Refinancing involves shifting your loans from national student loans to personal pupil loans, shedding help applications including income driven repayment. It would also necessitate paying on loans again, and missing out the chance to bulk up your emergency fund with the savings.
- This advice only applies to federal loans. If you have private student loans you want to refinance, now is a good time.
- Learn more about getting or refinancing a student loan with CommonBond »
Refinancing student loans to save money is a no-brainer for people with private loans, or those who have already refinanced their federal loans into private. With interest rates low right now, the potential for saving money could be huge.
To refinance your student loans, you move your loans from one lender to another, generally at a better interest rate: from federal to private, or from one private company to another. Either way, refinanced loans are always held by private lenders.
But borrowers with federal student loans, which are in forbearance until September 30 as stipulated by the CARES Act, should think twice before refinancing right now. With interest rates set to 0%, student loans aren’t accruing any interest, and automatic payments have been put on pause. For now, student loans are essentially frozen in time, and it might be best for them to stay that way.
Once you refinance, you lose valuable protections
Student loan expert and personal finance author David Carlson says refinancing before the federal student loan forbearance ends comes with a major risk: losing the protections of income-driven repayment plans, loan forgiveness, and more.
The federal student loan program has safety nets built in that you lose when you refinance. Some of those safety nets include the federal forbearance that currently applies to all borrowers due to the coronavirus pandemic. Income-driven repayment plans, which limits student loan payments to a percentage of your income, pay as you earn plans, and public service loan forgiveness could also be critical for people who have lost work during the pandemic, or face uncertainty going forward.
Private student loan borrowers don’t have these options available. While private student lenders can also offer some assistance — some have launched their own plans to help borrowers affected by the coronavirus pandemic — it’s not the same level of protection.
If you refinance, Carlson says, “there’s really no going back. It’s something that you can’t undo, and you do lose those protections.” Just because you don’t need these safety nets today doesn’t mean you won’t tomorrow. Losing them due to refinancing could be a big missed opportunity in uncertain times.
You’ll likely have to pay your loans back if you refinance
If your income hasn’t been drastically affected by the pandemic — likely the case if you’re considering refinancing — you’ll have to start paying your loans again after making the switch. And, that money could be put to better use.
“I think it’s a big, rare opportunity to beef up your savings and increase an emergency fund,” Carlson says. Keeping cash on hand could be the best line of defense you have against taking on high-interest debt if you find yourself unemployed, or lose income.”Give yourself a little more breathing room, especially together with how unpredictable things have been since March and could be going into next year,” he says.
Cait Howerton, a senior financial coach at SmartPath, says your priorities should depend on where you are financially. For people who don’t have any high-interest debt, and who have a full emergency fund and a steady income, “start accelerating your student loan payoff,” she suggests. “Right now, interest isn’t accruing, and it’s a perfect time to really make some traction on the principal.”
For people with high-interest debt, using the money that would have gone towards student loans to pay off that debt might be a smarter move. And for anyone without an emergency fund, Howerton says it’s time to start one. “If you don’t have at least a three-month emergency fund, that has to be on your mind,” she says.
Since interest isn’t accruing and borrowers aren’t required to pay, keeping your money and leaving federal student loans in forbearance is generally safer, and maybe smarter, than refinancing. “You can’t do any better than 0% interest, even with refinancing,” Howerton says.
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