As the effects of the pandemic continue to wear on, many Americans are ready to move past the challenges of COVID-19 (and really, most of 2020-2021), but some level of uncertainty has become a part of daily life this year. The cascading effects continue to reach from financial markets to college campuses, and adapting to change has become this year’s new normal. Among the unprecedented things we’ve seen this year are historically low interest rates and significant changes to the student loan landscape.
With the passing of the first federal COVID-19 response stimulus bill, known as the CARES Act, on March 27th, 2020, Federal student loan borrowers were not obligated to make monthly payments until September 30th, 2020. Additionally, Federal borrowers will not be charged interest on their loans during this time. This change went into effect automatically with no action required by borrowers. And with this benefit set to expire at the end of September and no clear end to the pandemic in sight, President Trump signed an Executive Order on August 10th, 2020, extending the payment and interest holiday through the end of December 2020 then, President Biden further extended the freeze until January 31, 2022.
Some additional notes on the nuances of the CARES Act offering:
- Borrowers pursuing Public Service Loan Forgiveness (PSLF) would have these months count as progress towards the 120 required payments to reach forgiveness.
- The interest and payment waiver is only available on Federal student loans held by the Department of Education – NOT private student loans.
- Borrowers are able to make payments during this Federal payment holiday, if they would like. Payments made during this time will be applied directly to the loan principal.
With these changes and extensions, borrowers may want to consider not only their options during the Federal interest holiday, but also the implications for 2022 and beyond. For many borrowers looking at the current loan landscape, it’s a question of what now and what next?
What Borrowers Are Doing Now
With the Federal student loan interest and payment waiver set to continue through the beginning of 2022, many borrowers have been content to continue taking advantage of this unprecedented offering. And there is plenty of merit to utilizing this strategy. After all, the 0% interest being charged on Federal loans is below the market rates private lenders are able to offer on refinanced loans. One thing to keep in mind with this approach is that the payment and interest holiday will come to an end at some point, and the loan will return to its regular payment and interest rate. This usually means returning to an interest rate in the 6% – 7% range for the remaining life of the loan, depending upon when the loan was taken out.
So, for many borrowers not planning to pursue Public Service Loan Forgiveness (PSLF), now is the time to begin strategizing what repayment will look like after the CARES Act/Executive Order benefits expire. For some, this will mean transitioning into Income-Driven Repayment (IDR) programs to take advantage of the payment relief they provide. For others, it will mean taking advantage of the low interest rate environment and refinancing Federal loans with a private lender.
The Current Loan Refinancing Marketplace
For those with private loans, now is an excellent time to examine refinancing options. Since these loans don’t qualify for Federal benefits, borrowers should be seeking out the lowest interest rate on a repayment term that yields comfortable monthly payments and provides them with loan terms they want. And with near historically low rates, there is often an opportunity for significant savings. Many lenders are currently offering extra incentives, like limited-time rates to encourage refinancing during this time. One lender, Laurel Road, is also offering special pricing for certain healthcare practitioners. Simply put, for borrowers who have private loans, it is highly advisable to see what refinanced rates they qualify for during this low interest period.
As mentioned, many Federal loan borrowers are currently taking advantage of the temporary 0% interest and payment holiday benefit being offered. However, even with an extension resulting from the executive order, physicians may prefer to refinance Federal loans and lock in low rates for the entire life of the loan – rather than have 0% interest for just a few months and the permanent features like income-based repayment options.
But why would someone refinance a loan that is currently at 0% interest and will be until 2022? In a nutshell, rates being offered by private refinance lenders in January could be higher than they are today. The advantage of locking in a lower rate now is that borrowers could potentially save more money over the life of their loans than they might by taking advantage of a few more months of 0% interest on their federal loans. Of course, refinancing will be an option at the end of this interest waiver period, but who knows at what rate? But borrowers also have to consider whether they will need financial safeguards after January 2022 as refinancing to a private loan means the loss of federal repayment options like income-based repayment.
As always, there is no one size fits all approach to loan repayment, so it’s crucial that borrowers do their own individual research to formulate their optimal repayment strategy. And this doesn’t mean looking at loan repayment options in a silo. Student loans are ultimately only one piece of a financial plan, so borrowers must examine them within the context of their greater financial situation.
Understanding the Differences Between Federal and Private Loans
To help borrowers understand the implications of refinancing Federal loans to private student loans, the following table highlights what would be different, and what would remain the same. But each private lender is different, so be sure to check with your lender for more information about each of these.
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[Editor's note: Many thanks to Laurel Road for their generous contribution to the WCI Medical School Scholarship. Every year 100% of donations go directly towards funding the prize money. Thank you for supporting those who support the scholarship!]
Updated September 2021