Borrowers might be considering a refinance as a way to lower their loan costs with many private student loan rates dropping over the last months. But doing so during the ongoing COVID-19 crisis might not be the right time, especially if you want to refinance federal student debt. Refinancing federal student loans during COVID-19 means waiving crucial borrower protections, including student loan relief provided by the CARES Act.
Here’s why you should reconsider refinancing federal student loans during the coronavirus pandemic.
Why You Shouldn’t Refinance
You take out a new student loan with a private lender when you refinance. The new loan pays off and replaces your existing student loans (federal or private). Refinancing student loans can be an attractive option to combine and simplify student debt, to adjust loan payments or terms, and to potentially secure a lower student loan rate.
But private lenders don’t offer the same protections you get with federal student loans. They won't change repayment plans or pause payments. Refinancing will also mean losing out on student loan relief offered in response to the coronavirus pandemic.
Refinance Federal Student Loans, Lose CARES Act Relief
The CARES Act extends unprecedented student loan relief for federal student loan borrowers. Benefits to borrowers with federally-owned student loans include administrative forbearance that automatically suspends payments until May 1, 2022. Forbearance was set to expire on Jan. 31, 2022, but it was extended by 90 days in December 2021.
Forbearance applies to payment requirements for Public Service Loan Forgiveness, forgiveness offered through income-driven repayment plans, and student loan rehabilitation.
All interest charges are suspended through May 1, 2022 as well. No accruing interest means that your student loan balance won’t increase, and you won’t pay for this pause in payments It can be a chance to pay down your principal or any previously accrued interest if you do choose to continue making payments during this time.
The CARES Act relief was substantial enough that several private lenders, such as Citizens Bank and SoFi, advise borrowers who are considering refinancing to review these benefits when deciding whether to do so.
With no interest and no payments, borrowers save by leaving their federally-owned student loans as they are until all applicable deadlines expire.
Other Long-Term Benefits You’d Be Giving Up
The CARES Act has provided key student loan relief, but it didn’t cover all federal student loans. Some, including Federal Family Education Loans (FFEL) and Perkins loans, are guaranteed by the U.S. Department of Education but they're owned by private lenders.
The Department of Education announced on March 31, 2021, that it would grant the same waivers for FFEL that have been afforded to other federal student loans. That means 0% interest due between March 13, 2020 through May 1, 2022, and payments are paused until May 1, 2022 as well.
Any payments that were made can be refunded upon request, and any wages or tax refunds that were garnished will be returned. The loans will be restored to current status. Credit bureaus will be notified to remove any delinquency reports from credit reports.
You can still benefit from other federal student loan protections if your student loans aren’t eligible for coronavirus relief, or if student loan relief runs out.
Refinancing a federal student loan means losing these protections, which you might want to take advantage of.
Forbearance and Deferment
Many private lenders offer forbearance options to pause payments, but it’s not guaranteed protection as it is with federal student loans. Student loan servicers are directed to grant forbearance or deferment to assist borrowers in certain situations.
Reasons for federal student loan deferment include job loss, financial hardship, a return to school, or active military service. A student loan forbearance is an option to borrowers and can be granted to ease financial hardship, job loss or income drop, medical expenses, and other situations.
Alternative Repayment Plans
A refinanced private student loan is locked into a set repayment schedule. The only way to change your monthly payments is to refinance yet again. But borrowers can request a different federal student loan repayment plan at any time.
One option for struggling borrowers is an income-driven repayment plan, such as Income-Based Repayment (IBR), Pay as You Earn (PAYE), and Revised Pay as You Earn (REPAYE). All of these are designed to keep your monthly payments affordable, and they offer forgiveness of any remaining balances after 20 to 25 years.
Federal Student Loan Forgiveness
The last benefit to consider is federal student loan forgiveness. Federal programs such as Public Service Loan Forgiveness and Teacher Loan Forgiveness will cancel a portion of student debt if the borrower meets employment and other eligibility requirements. Student loans can also be canceled if the borrower dies or is permanently disabled, and in some cases of school misconduct or closure.
Only federal student loans qualify under these programs, so refinancing would mean losing the chance to claim this loan forgiveness.
More Federal Student Loan Relief Could Be Coming
President Joe Biden has proposed suspending student loan payments and interest for anyone with income under $25,000. He also has proposed student loan forgiveness after 20 years of repayment, as well as more immediate loan cancellations through the Public Service Loan Forgiveness Program.
Biden suggested that he would suspend $10,000 in student loan debt soon after he took office. But researchers are suggesting that a shift to an income-based repayment system would provide more relief for lower- and middle-income students and the government's bottom line as well.
The Bottom Line
No one can predict exactly what will happen with federal student loan policy in the coming year. But federal student loans already offer robust protections and options to borrowers no matter what happens in the realm of student loan policy.
It may be worth passing on student loan refinancing in favor of access to federal student loan options in uncertain financial times like these, such as forbearance, deferment, or income-driven repayment.