If your financial circumstances have changed over the past couple of months, you’re not alone. Unemployment claims in the US for the month of March topped ten million. Millions of other workers had their hours reduced as organizations try to cut labor costs in response to the economic crisis caused by the coronavirus pandemic.
To be fair, these cuts also served to protect both worker and public health. Many employees who work for essential businesses and health care institutions don’t have a choice but to keep working. But one thing’s for sure. We’re all thinking about the future in a new way. Financial prudence is the watchword of the day.
Taking financial inventory is essential right now, especially for people carrying student debt. Student loan debt has been on the rise for a decade or more and now surpasses both credit card and automobile-related debt at $1.4 trillion. While student loans are typically available at lower interest rates than some other loans, the necessity of a college degree in today’s job market and the rising cost of education continue to drive student debt higher.
If you have a substantial amount of student debt, you may be considering refinancing. The rates associated with many kinds of loans have been erratic as financial institutions struggle to get their arms around the new pandemic economy. But the student loan market is one instance where an overall rate reduction could be on the horizon.
That’s because student loan interest rates are tied to the ten-year notes issued by the US Treasury. As investors are turning more often the safety of these government-backed T-notes, their price has gone up and the return on investment they offer has gone down. Financial institutions, because they both invest and loan money, are weighing their options. In today’s economic climate, they can afford to offer loans at lower student loans rates and still earn more than they would by investing in T-notes.
What’s the best student loan refinancing strategy for you? That depends on a number of factors. Here are some of the questions you should ask yourself before deciding whether, when, and how to refinance your student loans.
What kind of student loan debt are you carrying?
In an effort to provide relief during the coronavirus crisis, the federal government has temporarily suspended both principal and interest payments on federally-funded student loans through September 30, 2020. If most or all of your loans are federally-funded, you may not want to refinance. In addition to the five-month cushion the government is providing, your federally-funded loans came with a fixed rate when you took them out. That rate may still be lower than the rates currently being offered by private lenders. What’s more, the 2020 election may result in new federal student loan forgiveness regulations. You could see a windfall just by waiting.
What rate(s) am I currently paying on my student loan(s)?
Many students carry a mix of private and federally-funded loans. Refinancing federally-funded debt with a private lender rarely makes sense, not only because rates private lenders’ rates tend to be higher, but also because you may give up some important federal loan benefits. These include income-based repayment requirements and payment deferment when you are unemployed. However, refinancing the portion of your student debt that you owe to private lenders will lower the lifetime costs of your education debt if you can secure a better rate now than you signed up for way back when.
Refinancing may especially benefit you if you have a higher credit score now than you did when you took out your loans. Borrowers with strong credit typically receive the lowest rates offered by banks. If you’ve amassed a great credit history, it’s a smart idea to make it work for you. That can be true of other types of loans, as well. If you are carrying a lot of credit card debt and your credit rate has improved, you may want to apply a new credit card that offers a 0% introductory rate and the option to transfer balances from other high-interest cards. If you’re facing a serious cash flow problem, prioritizing loans that come with high late fees is also a smart practice. However, nearly all delinquent payments reverberate as negative marks on your credit report.
If I can’t get a better rate, can I still lower my payment?
If you are struggling to meet your monthly loan commitment, refinancing into a longer-term loan can bring you payments down, assuming you have maintained or improved your credit rating. Bear in mind that longer-term loans usually come with higher lifetime costs. But if you’re experiencing a cash flow crunch, that could be the route to take to relief.
Any other tips on refinancing?
Student loans are complicated documents. Some of the advantages and pitfalls they offer may not be immediately obvious. Take the time to review a wide range of lenders’ rates using one of the many online comparison resources available. But be sure to dig deeper into each loan companies’ practices. Some individual lenders pull a hard inquiry on your credit report when you apply for a loan, while some marketplace-style websites do not. Too many inquiries can have a negative impact on your credit score, which may be the last thing you need right now. Check for loan origination fees and other hidden costs associated with each of the loans you consider. And don’t forget to look for benefits that may become vital down the road, including loan forbearance in times of financial stress.