Why You Shouldn’t Refinance Federal Student Loans During COVID-19

It could mean coronavirus student loan relief and federal protections disappear.

Female student studying with textbook with other students working at desks behind her.
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With many private student loan rates dropping over the last several months, borrowers might be considering a refinance as a way to lower their loan costs. 

But right now—during the COVID-19 crisis—might not be the right time for this move, 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 current coronavirus pandemic.

Why You Shouldn’t Refinance Federal Student Loans Right Now

Here’s how refinancing works: You take out a new student loan with a private lender that 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, adjust loan payments or terms, and potentially secure a lower student loan rate. 

But private lenders don’t offer the same protections you get with federal student loans, such as changing repayment plans or pausing 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. New benefits to borrowers with federally-owned student loans include:

  • Administrative forbearance that automatically suspended payments until Dec. 31, 2020.
  • Suspension of all interest charges for the same period—no accruing interest means your student loan balance won’t increase, and you won’t pay for this pause in payments (if you do choose to continue making payments, it can be a chance to pay down your principal or previously-accrued interest, if you have any)
  • Forbearance toward satisfying payment requirements for Public Service Loan Forgiveness, forgiveness offered through income-driven repayment plans, and student loan rehabilitation

The CARES Act relief has proven substantial enough that several private lenders, such as Citizens Bank and SoFi, advise borrowers considering refinancing to take these benefits into consideration when deciding whether to refinance.

With no interest and no payments, borrowers save by leaving their federally-owned student loans as is—at least until after Dec. 31, 2020.

Other Long-Term Benefits You’d Be Giving Up

While the CARES Act has provided key student loan relief, it doesn’t cover all federal student loans. Some—including FFEL loans and Perkins loans—are guaranteed by the Department of Education but owned by private lenders.

If your student loans aren’t eligible for coronavirus relief or the current student loan relief runs out, you can still benefit from other federal student loan protections. Refinancing a federal student loan, on the other hand, means losing these protections you might need right now.

Forbearance and Deferment

While many private lenders offer forbearance options to pause payments, it’s not a guaranteed protection. With federal student loans, it is. Student loan servicers are directed to grant forbearance or deferment to assist borrowers in certain situations.

Reasons for federal student loan deferment include a job loss, financial hardship, 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 refinancing yet again. In contrast, borrowers can request a different federal student loan repayment plan at any time. 

A smart option for struggling borrowers are income-driven repayment plans 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 monthly payments affordable, and offer forgiveness of any remaining balances after 20 to 25 years.

Federal Student Loan Forgiveness

The last benefit to consider: federal student loan forgiveness. Federal programs such as Public Service Loan Forgiveness and the 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

With several student loan proposals flying in a presidential election year, a wait-and-see approach to refinancing student loans could be wise. Though we don’t know for sure what will happen, we’ve already seen student loan relief extended beyond the initial CARES Act date of September 30, thanks to President Trump’s executive order on Aug. 8, 2020.

Congress is currently working on two competing pandemic relief bills, too: the HEALS Act and the HEROES Act. The HEROES Act includes a 12-month extension on the suspension of payments and interest, through September 2021. The HEALS Act would simplify federal repayment options to two options, including an income-driven option.

However, as of Aug. 19, 2020, both bills have stalled, and congress is holding ongoing negotiations on the next stimulus bill. 

Lastly, the 2020 election results could shift political power that might lead to big changes to federal student loan policy. Presidential candidate Joe Biden’s platform policies include a suspension of payments and interest for anyone with income under $25,000. He’s also proposed student loan forgiveness after 20 years of repayment, as well more immediate loan cancellations through Public Service Loan Forgiveness.

The Bottom Line

No one can predict exactly what will happen with federal student loan policy in the coming months or years, of course. But whatever happens in the realm of student loan policy, federal student loans already offer robust protections and options to borrowers. 

In uncertain financial times like these, it may be worth passing on student loan refinancing in favor of access to federal student loan options like forbearance, deferment, or income-driven repayment—at least for now.

Article Sources

  1. Federal Student Aid Office. "Coronavirus and Forbearance Info for Students, Borrowers, and Parents." Accessed August 20, 2020.

  2. Federal Student Aid Office. "Get Temporary Relief." Accessed August 20, 2020.

  3. Federal Student Aid Office. "Income-Driven Repayment Plans." Accessed August 20, 2020.

  4. Federal Student Aid Office. "Student Loan Forgiveness." Accessed August 20, 2020.

  5. The White House. "Memorandum on Continued Student Loan Payment Relief During the COVID-19 Pandemic." Accessed August 20, 2020.

  6. Library of Congress. "The HEROES Act." Accessed August 20, 2020.

  7. JoeBiden.com. "The Biden Plan for Education Beyond High School." Accessed August 20, 2020.