Breathe in. Breathe out. We know there is a lot of uncertainty as the world faces the challenges and realities of COVID-19. While many of us are working remotely or facing job uncertainty, transferring our schooling online, and putting many aspects of our life on hold, the reality is that not everything can come to a full stop. Student loan debt reached another all-time high back in 2019 and many graduates are looking into options to repay their debt.
On top of he various repayment options available to borrowers, the government has been announcing new, short term but open-ended policies for federal student loan holders. There is a lot to digest, but there are ways you can bring some certainty to paying off your student loan debt.
Private vs. Federal Loans: Understanding Your Options
The two major categories of student loans available today are private student loans and federal student loans. Federal student loans are taken out through the government and comprise more than 90% of education, debt, while private student loans are obtained through private financial institutions, such as banks and credit unions.
The federal government announced a pause on student loan interest as a response to Coronavirus on March 13. In essence, student loan interest will freeze, meaning interest will not accrue on certain loans until the policy is changed. In addition to pausing student loan interest, it was announced on Friday, March 20, that all federal student loan borrowers now have the options to suspend their monthly payments for at least the next 60 days. These rate reductions and payment suspensions only apply to federal loans, and therefore won't have an impact on private student loans or loans that have been previously refinanced.
Prior to the announcement of federal loan interest freezes, the Federal Reserve cut the federal funds rate to 0-0.25%. While federal rates where recently cut, refinancing rates from private lenders have been the lowest that we have seen seen in nearly 10 years. Private lenders are doing their part to offer relief as well, like student loan refinancing platform, LendKey, by offering emergency benefits as its network of lenders have responded with rate drops alongside the Fed. As of March 26, 2020, fixed rates are low as 3.39% APR and variable rates as low as 1.90% APR.
For borrowers of existing student loans, many lenders have begun making special options available to offer relief from the stress caused by COVID-19. As of today, most student loan refinancing companies have responded in some way to the crisis on their website. While these companies haven't publicly posted their specific policies, they do have information available on their homepage along with contact information to speak with their specialists.
If you currently have private, federal, or both types of student loans, here are other relief options to consider, such as refinancing some, or all, of your student loans.
What exactly is Student Loan Refinancing?
When you refinance your student loans, you pay off your existing student loan(s) with a brand new one. This allows you to seek better interest rates, terms, or lower your monthly payment to better fit your budget. The new loan payment and interest rate will commonly be driven by your credit score, credit history, and income, as well as other factors that can vary by lender.
Refinancing is done through private lenders like banks and credit unions. If you have federal student loans and rely on their income-based repayment plans or are planning on qualifying for Student Loan Forgiveness, you may want to stick with your federal loans and consider a federal loan consolidation, which gives you one payment to manage but average the rates of your existing loans so you don't save any more in interest.
How Can Refinancing Help During This Crisis?
Many millennials, in particular, have discovered when they graduated that paying off their student loans wasn't as simple as everyone made it sound. You may have to work a less lucrative job for a while before you're able to get a high-paying career that corresponds with your major. You might even fing that getting work in your field takes longer than you anticipated. Worse, you may have worked for a period of time in your industry, but suffered a financial setback that left you struggling to meet your student loan payments each month.
Especially now, with many facing cutbacks in their hours, or losing employment completely, it could be a crucial time to reevaluate your financial situation. Explore your options, such as looking into federal benefits like income-based repayment, as well as seeking out options from private lenders. Savings matter, and having the opportunity to lower your interest rate or reduce your monthly payment now, could have a huge payoff down the line.
It's important to remember that you still must be in good financial shape to refinance. Factors like credit score, debt-to-income ratio, or having a creditworthy cosigner will all play a role in your ability to qualify. Before refinancing, you may want to talk with your existing lender about whether or not they can work with you to lower your payments. Carefully consider whether you'll stand to save money by refinancing. If so, refinancing may be a great move for you. On the contrary, if you have poor credit, already have great interest rates, can maintain a zero-interest federal loan or suspend federal loan payments for 60 days, refinancing might not be the best option at this time.
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