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Refinancing student loans to save cash is obvious to others with personal loans or those who have already refinanced their federal loans into personal loans. With recently low interest rates, the possibility of savings can be huge.
To refinance your student loans, move your loans from one lender to another, at a higher interest rate: from federal to personal, or from one personal company to another. In all cases, refinanced loans are still maintained through personal lenders.
But borrowers with federal student loans, who are abstaining until September 30 as stipulated in the CARES Act, think twice before refinancing now. With interest rates set at 0%, student loans do not generate interest and automatic bills have been suspended. At the moment, student loans are necessarily frozen over time, and could be higher if they remain frozen.
David Carlson, an expert in student and non-public finance loans, says refinancing before the end of the federal student loan abstention carries a primary risk: losing the protections of income-based repayment plans, loan cancellation, and so on.
The federal student loan program has built-in safety nets that you lose when refinance. Some of those safety nets come with the federal abstention that lately applies to all borrowers due to the coronavirus pandemic. Income-based repayment plans, which restrict student loan payments to a percentage of their income, as-you-earn repayment plans, and cancellation of public service loans may also be imperative for others who have lost their jobs to the pandemic or face uncertainty in the future.
Private student loan borrowers do not have those features available. While personal student lenders may also offer assistance, some have submitted their own plans to borrowers affected by the coronavirus pandemic, this is not the same point of protection.
If refinance, Carlson says, “there’s no going back. It’s something you can’t undo, and you lose the protections.” Just because you don’t want those safety nets today doesn’t mean you probably won’t have them tomorrow. Losing them due to refinancing can be a wonderful missed opportunity in this moment of uncertainty.
If your source of income has not been particularly affected by the pandemic, you are probably contemplating refinancing, you will need to start repaying your loans after making the change. And that cash can be more used.
“I think this is a wonderful and uncommon opportunity to accumulate your savings and create an emergency fund,” Carlson says. Keeping money at your fingertips can be the opposite line of defense to high-rate debt if you are unemployed or lost income. “Give yourself a little more leeway, especially given the unpredictable nature of things since March and for next year,” he said.
Cait Howerton, senior monetary coach at SmartPath, says his priorities deserve to be counted on. For others who don’t have high-interest debts and have a full emergency fund and solid income, “start accelerating your student loan repayment,” he suggests. “Right now, interest is not accumulating, and this is the best time to take advantage of capital.”
For others with high-interest debts, the cash that would have been used for student loans to repay that debt may be a smarter decision. And for anyone who doesn’t have emergency funds, Howerton says it’s time to create one. “If you don’t have an emergency fund for at least 3 months, you’ll have to keep it in mind,” she says.
Because no interest accrues and borrowers are not required to pay, it is safer, and perhaps smarter, to keep their cash and leave federal student loans in abstain than refinancing. “You can’t make more than 0% interest, even with a refinancing,” Howerton says.