Don’t Refinance Federal Student Loans During the COVID-19 Crisis

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By Kristen Kuchar

April 17, 2020

There are pros and cons to refinancing student loans. But federal student loans are much different than private student loans, especially when it comes to refinancing. Federal student loans come with a slew of benefits that you will lose if you refinance. Now especially is a time to think twice about refinancing federal student loans during the coronavirus crisis. Here’s why you shouldn’t refinance federal student loans right now:

Federal Student Loan Payments are Suspended

Thanks to the CARES ACT, some federal student loan borrowers are able to stop making payments on student loans through September 30, 2020. Federal student loan borrowers are automatically placed in an administrative forbearance, which means nothing is due on your student loans during this time period.

The CARES Act also waives the interest on these loans while the payments are paused.

This comes as a relief to many who are losing their jobs or having their income impacted. Even if you didn’t lose your job, you can now use that money to create an emergency fund in case you become unemployed later.

For borrowers working towards Public Service Loan Forgiveness or enrolled in an income-driven repayment plan, the paused payments will still count towards your cancellation time.

Even though many private lenders are offering options to pause payments for a few months, if you refinance federal loans, you’ll lose the better benefit.

Federal Student Loans Aren’t Accruing Interest

Besides the fact that you don’t have to pay on most federal loans, your loans will not be accruing interest. This means the balance is going to stay put; not grow with increased interest.

If you have a solid job and an emergency fund, and want to continue to still make payments, your payment is going to go entirely towards the principal balance.

Private student loans don’t do that.

Joe Biden is Proposing to Cancel Some Student Loan Debt 

In Biden’s proposal, undergraduate student loan forgiveness would be available for borrowers who earn less than $125,000 per year. But this is only for federal student loans; not if you refinance into a new private student loan.

Forgiveness is limited to “tuition-related federal student debt.” Graduate federal loans and private student loans will not be included in this forgiveness. It is only for federal undergraduate loans for public colleges. Federal student loans from historically black colleges and universities (HBCU) and minority serving institutions (MSI) are also eligible for this forgiveness.

Other Possible Widespread Forgiveness for Federal Student Loans

Many Senators are calling for widespread student loan forgiveness during the COVID-19 pandemic, but only for federal student loans.

Loss of Other Federal Benefits

There are additional everyday benefits you’d lose if you refinance federal student loans now or ever. These include:

  • Pause payments if you lose your job
  • Pause payments if you experience economic hardship

What about Refinancing Private Student Loans?

If you have high-interest private student loans (not federal), weigh the pros and cons of refinancing. If you decide it’s right for you, learn how to choose a lender and what you need to qualify.

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