|Student loan debt strategies in age of coronavirus|
|Is refinancing the best bet? It depends|
|Published Friday, July 10, 2020 3:20 pm|
|PHOTO | TROY HULL|
|Americans are swimming in student debt, with about a third of people age 18-29 owing money on education loans and another 22% age 30-44.|
Mention student loan debt and most people envision college-age students and recent graduates. And they’re partly correct.
In the U.S., about a third of people aged 18 to 29 owe money on educational loans. Close behind at 22% are Americans aged 30 to 44. But there are people over the age of 60 who are still paying for the education they received decades ago. Student loan debt is pretty democratic that way.
What’s new in student loans?
In the wake of the coronavirus, Congress passed the CARES Act, which provides temporary relief on loans issued by the Federal government. Payment requirements and the accrual of interest on qualifying loans have been suspended through September 30, 2020. The act also prohibits collection activities on loans that have fallen into default.
Unfortunately, the CARES Act doesn’t apply to all types of student loans. Private loans, which are owed to banks and finance companies and Perkins loans, which are owed to individual colleges and universities, don’t qualify for relief under the CARES Act. Millions of students—and parents—whose financial security has been upended by the global pandemic are struggling to make their monthly payments. They’re looking for solid strategies to see them safely through the upheaval we’ve faced as a nation since the coronavirus took hold of the global economy. Many are considering refinancing their loans. Does refinancing make sense for you or your family? The answer is a qualified maybe.
Silver lining in coronavirus cloud
The coronavirus has influenced financial markets in myriad ways. For one thing, investors who once leaned toward speculative stocks and industries have suddenly turned risk-averse.
Many have flocked to the relative safety of Treasury Bills—specifically the 10-year T-note. As demand for these notes has increased, their yield has decreased. Lending institutions that might have previously invested in T-notes can now make more by extending loans at remarkably low interest rates. What’s more, the Federal Reserve Bank’s response to the coronavirus crisis has been to lower its rate drastically. That means banks can temporarily borrow “cheap” money from the Fed.
The best student loan refinancing deals reflect these high-level changes in two ways. Lenders have lowered both fixed- and variable-loan interest rates. So depending on your tolerance for risk, you may want to lock in a low fixed-rate student loan now or choose an even less expensive variable-rate loan, bearing in mind that your loan rate is subject to change in a few years’ time.
Which loans to refinance?
Many students carry a mixed bag of student loan debt. If you took out federal student loans some years ago, check your documents to remind yourself of the rate you signed up for.
It could be that you are paying a higher rate than the best private student loan companies could offer you right now. That’s if you want to give up some of the unique benefits federal student loans offer. Case in point: the no-payment, zero interest break the Feds are giving you right now. Federal student loans also give you other options like income-based payments and more lenient forbearance policies. Those benefits are still and will always be in place for you.
If you took out private loans to attend school, in almost all cases you are likely to find a lower-rate loan if you refinance now. That’s particularly true if your income has gone up or your credit score has improved since you took out your original loan.
Lenders will consider you a safer financial proposition if your debt-to-income ratio has improved, which it may well have since you’ve been paying against your loans for some time.
If you’re considering refinancing, now might be a great time to download your free credit report.
Scan it for inaccuracies that may be bringing your score down. Pay down some high-interest credit cards if you’re able to do so. Lenders reserve their lowest rates for borrowers with a strong credit history. You may also be able to earn a lower rate and lower the lifetime cost of your student loans by refinancing into a shorter-term loan than you are currently carrying.
Susan Doktor is a journalist and business strategist from New York City. She writes, guest-, and ghost blogs on a wide range of subjects including finance, technology, and government affairs.
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