On March 13th, as President Trump declared a federal state of emergency in response to the COVID-19 crisis, he declared that student loan interest would be waived. The CARES Act further clarified that no federal student loan payments would be due between passage of the bill and September 30th and that interest would not accumulate on federal loans. This “black swan” event is obviously going to have massive effects on borrowers themselves, student loan refinancing companies, and companies like The White Coat Investor, LLC that refer people to those companies to refinance their loans.
In today's post, I'm going to go over the nuts and bolts of all this and help you make decisions about what to do with your loans between now and then.
You Still Need to Refinance Your Private Loans (Again)
The first point to make about all this is that it ONLY applies to federal loans. If you have already refinanced your loans, you no longer have federal loans. You have private loans. And the Fed just cut interest rates. So this might be a great opportunity for you to refinance again.
In the words of Wolverine, “If you haven't been to the Barnum Museum lately, you haven't been to the Barnum Museum.” If you can get a lower interest rate on your private loans than what you currently have, refinance. Not only will you benefit from paying less interest (allowing you to put more toward principal), but if you go to a company on my list that you haven't yet used, you'll get another cash bonus.
Likewise, if you are still carrying around 8-10% private student loans from medical school and just haven't gotten around to refinancing, there is no time like the present. Refinance them!
How Does the Federal 0% Interest Thing Work?
The federal 0% student loan interest rate is supposed to happen automatically. In fact, the 0% started on March 13th by executive order, so it's actually just over 6 1/2 months of 0% interest.
Note that federal loan servicing companies are notorious for providing poor service. Consider this email I received recently:
My husband and I were just about to refinance about $250K of student loans when the recent Coronavirus legislation passed….My understanding from reading the legislation is that the suspension of payments is for all eligible federally held loans and should be applied by the student loan servicers automatically and that there is no need for the borrowers to do anything to get this suspension/forbearance to apply.
However, my student loan servicer (Nelnet) will not be automatically applying a 6 month forbearance unless the borrower is past due. If you aren't past due (which I would assume most readers/listeners are not) you have to actually apply to get the forbearance placed on your account, otherwise, they will continue auto-debiting your required monthly payment. This did not seem correct to me, but I spoke with a manager at Nelnet and she informed me that they aren't required by the Dept of Ed to
automatically suspend automatic payments on accounts that are current. (It would seem to me that this is an unfair/biased interpretation of the law…they are a business, after all, and will benefit from continuing to collect payments from borrowers who aren't paying close attention to their accounts and who may be assuming the payment suspension automatically applied to them.)
I then called the Dept of Ed, and the exasperated advisor I spoke with there had absolutely NO idea what the right answer was…he said some servicers were doing it automatically and others you have to call and ask for it. Hence why I am writing to you! If you are planning on writing any blog posts about the impact of this legislation on strategies for student loan management (not only for those who are holding off on refinancing for now, but also those going for PSLF) it might be wise to recommend that borrowers with federally held student loans check with their individual loan servicer to see if they need to actually APPLY to get the suspension of required payments. Some loan servicers, like Navient, are automatically doing it for their borrowers, while others, like Nelnet and Fed Loan, require you to ask for a 6 month suspension of payments. I would also assume that most readers/listeners are enrolled in auto-pay to get the additional .25% interest rate reduction, and would probably be very disappointed to sit back and do nothing assuming their payments were suspended only to see the required payments continue to auto-debit from their accounts for the next 6 months.
I do not know if this Nelnet manager was simply misinformed nor whether this situation has now been corrected or not, but consider yourself warned about the experience at least one of my readers had.
How Does the Tax-Free Employer Paid Student Loans Work?
Another provision of the CARES Act allows your employer to pay up to $5,250 of your student loans, take a tax deduction for it, and then provide it to you as a tax-free benefit. You should definitely ask your employer about this option. If YOU are your own employer, I believe you may also qualify for this benefit, but I'm still searching for details about this possibility for independent contractors, partners, those running sole proprietorships, and others in similar situations. If you have some definitive information, please provide it in the comments.
Companies Aren't Going to Match the Feds
The most painful part of this new 0% federal student loan policy is that those who were responsible, paying attention, managing their loans well, minimizing their interest, and planning to pay off their loans are being punished for doing so. I know it doesn't feel fair that the government is waiving interest/payments for those with federal student loans but doing absolutely nothing for those with private loans. I'm sorry. As I tell my kids all the time, life isn't fair. There is a lot of stimulus going on right now, and when this is all said and done, there are going to be a lot of people correctly pointing out that the process wasn't very fair.
I have been in this space longer than all of the student loan refinancing companies and have met a fair number of the CEOs personally over the years. Knowing both of our businesses were not going to do well with this new development, the first thing I asked them to do is to come out with a product that would match the federal loan program. That is to say, a refinanced loan that offered 0% interest until September 30th. This would allow them to keep refinancing student loans as normal. No dice. It isn't that they don't want to (they would just have to charge a little higher interest after September 30th to make up for the 0% period), it's that it just isn't practical given the way most of these loans are packaged up and sold off to investors. I haven't completely given up hope (I was once told something similar about putting a program in place for residents with low monthly payments similar to the federal IDR programs), but I wouldn't hold your breath if I were you.
Companies Do Have Hardship Programs
Pretty much all of these companies do have economic hardship programs that allow you to not make payments for 2-12 months. If you are out of work and short on cash, be sure to talk to your lender about this option. Interest will still accrue, but at least it'll be accruing at a relatively low rate! Hopefully you'll be back to work in a few months and able to resume your payments.
Here's what Earnest says:
During this time of national emergency, Earnest is offering up to three months of postponed payments, through a disaster forbearance, to qualified clients who request it. Interest accrues during forbearance, but will not be capitalized (added to the unpaid principal) at the end of the forbearance period.
SoFi says this:
We may be able to offer forbearance for active Student Loan members who are financially impacted by COVID-19. As you consider forbearance, it's important to weigh the benefits of short-term relief vs. your long-term financial plan. While forbearance will allow you to skip two payments, it will cause your loan to accrue more interest over the life of the loan.
The conditions of forbearance are as follows:
- No payment required for 60 days, however interest will continue to accrue
- Loan term will be extended for 60 days to cover the missed payments
- Following the forbearance period, there may be a slight increase in your monthly payment as your loan is amortized to its new maturity date
Laurel Road (now owned by KeyBank) says this:
Laurel Road allows for forbearance for up to 12 months over the life of the loan.
CommonBond has a standard forbearance period of up to 24 months in addition to natural disaster forbearance (which lasts the length of the natural disaster). Here's CommonBond's statement on natural disaster forbearance:
As COVID-19 has been classified as a national disaster, it qualifies for national disaster forbearance. This functions in much the same way as standard forbearance, but due to the sudden and unexpected impact of COVID-19, you can take advantage of this program through the end of the national emergency declaration. Any time that you are in national disaster forbearance does not count towards your standard forbearance. As with any form of forbearance, be aware that interest will still accrue, but there are no fees involved with forbearance.
CommonBond also has a tool on their homepage that guides you through the federal programs and lets you check eligibility.
We have taken a couple steps to support people during this time. For one, anyone who has lost their job or is unable to pay on their loan should reach out to us, and we can work with them and our credit union and bank partners to help pause payments, waive fees, etc. However, for WCI readers, I see this as a less likely scenario than people just being upset related to the government providing relief to people who have federal loans without helping people who have private loans or have refinanced already (aka the people who were being financially responsible)….Deferments or forbearance may be offered depending on the lender. The lender’s policy will be stated on the credit agreement for the loan.
Borrowers demonstrating financial hardship may qualify for up to 3 months of forbearance.
No Real Change in the PSLF vs Refinance Question
A lot of people are wondering if this change makes going for PSLF a better option. It really doesn't move the needle there. If going for PSLF was right for you before, it is still right. If it wasn't, then it still isn't. These non-payments do count as payments toward the 120 required PSLF payments, and so there will be a little more money left to forgive after 10 years (more for attendings than residents since the payments they should have made are so much larger) but it isn't going to change the main decision for any significant number of people. If you are one of the very few going for IBR/PAYE/REPAYE forgiveness programs, these payments count toward those, too, but again, shouldn't move the needle on the decision itself.
Which Companies to Refinance With
Perhaps the most interesting development in this space is that rates went up with some companies while they went down with others. Steve Muszynski, CEO of Splash Financial, told me this:
While SoFi, Earnest and Commonbond have recently increased rates (by 1.50%!) due to a lock-up of funding in the securitization market, we will be reducing our rates beginning April 1st for medical professionals to truly historic levels (as low as 2.88% Fixed rate & most qualified applicants will receive a rate below 4% fixed for 5 – 15 year loan terms). Resident and fellow rates unfortunately won’t be reduced but everyone else can benefit & our resident and fellow rates are still very low right now….
Many doctors will be able to qualify for our lowest rates available of 2.88% fixed or 1.58% variable. Our thoughts are that while we can’t mimic the government’s 0% interest until September 30th, what we can hopefully offer is sizable savings over the life of the loan. These rates we are offering are likely temporary during the COVID-19 national disaster and are meant to help those who felt left behind by the government’s actions – specifically people who have refinanced previously.
Lendkey says this:
Prior to the announcement of federal loan interest freezes, the Federal Reserve cut the federal funds rate to 0 – 0.25%. While federal rates were recently cut, refinancing rates from private lenders have been the lowest that we have 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 as low as 3.39% APR and variable rates as low as 1.90% APR.
Laurel Road is offering a special lower rate for physicians and others on the front lines of this health care crisis.
So while it was always the right thing to do to apply with several companies (if not all of them) to get the lowest possible rate, it seems even more important than usual. Be sure to include Splash, LendKey, and Laurel Road in your search as many of you will find the lowest possible rates there right now.
Remember that rates change daily so don't be surprised if you are reading this months from now and rates are different.
New Bonus Disclosure
Earnest Welcome Bonus Offer Disclosure: Terms and conditions apply. To qualify for this Earnest Welcome Bonus offer: 1) you must not currently be an Earnest client, or have received the bonus in the past, 2) you must submit a completed student loan refinancing application through WCI link; 3) you must provide a valid email address and a valid checking account number during the application process; and 4) your loan must be fully disbursed. The bonus will be automatically transmitted to your checking account after the final disbursement. There is a limit of one bonus per borrower. This offer is not valid for current Earnest clients who refinance their existing Earnest loans, clients who have previously received a bonus, or with any other bonus offers received from Earnest. Bonus cannot be issued to residents in KY, MA, or MI.
“*Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Oct 10, 2020 and may increase after consummation.”
Five Reasons to Still Refinance
There are five reasons you may still want to refinance your student loans, even during the next six months:
# 1 Get a Lower Rate
Interest rates are low. If you already have private student loans and can refinance to a lower rate, then do it.
# 2 Get Some Cash
When you refinance through the links on this website, you get cash back. That's right. The deal is BETTER than you will get going directly to the lender. And while the main benefit of refinancing is paying less in interest, the cash back sure beats a kick in the teeth. Spend it on groceries and hand sanitizer, invest it to buy stocks on sale, or put it toward your loans.
# 3 Get Better Terms
If you already have private student loans and recently saw your income decrease (or go away altogether) you might be able to find some budgetary relief by refinancing into a longer-term product–for example, going from a 5-year loan to a 20-year loan. While this will probably increase your interest rate and the total amount of interest you pay on the loan, it will provide some short term relief. You can refinance back into a 5-year loan when you go back to work. You may also want to go to a lender with a better forbearance policy for additional help. Note that your loss of income may keep you from being able to refinance at all, of course. If that is the case, look into hardship forbearance with your lender as noted above.
# 4 Take Advantage of All Time Low-Interest Rates
Some people may fear that they will miss out on the lowest possible rates available right now if they wait until the end of September. My crystal ball is cloudy. It's entirely possible that the rate you can get now while business has dried up for lenders is significantly better than what you will get in 6 months. Service may be worse then, too, in the crush of people rushing to refinance after the temporary 0% federal loan interest rate expires. Perhaps it is worth paying a little extra interest over the next few months to get better service and possibly a better long term rate.
# 5 Be Ready to Refinance on September 30th
Finally, you may wish to gather your paperwork and even submit it during the next 6 months just so it is all ready to go on September 30th. You may even be able to “lock in” a lower interest rate for some period of time in there, allowing you to have your cake and eat it, too.
What do you think? Will you be waiting until September to refinance? If still refinancing, what companies are you looking at? If you already refinanced, do you feel cheated by this policy? Comment below!