Student Loan Debt Questions Raised by Coronavirus
Jun 19, 2020 06:14AM
By Susan Doktor
The global pandemic has ushered in a period of unprecedented financial uncertainty and reflection. With more than a million job losses in the state of Massachusetts, many residents are understandably apprehensive about what they’re taking in on a monthly basis. But consumer spending statistics indicate that, as a nation, we’re also keeping a close eye on what goes out. And that includes not just grocery and utility bills, but payments made against debt.
Massachusetts residents carry more than $28 billion in student loan debt. That debt is spread across multiple generations of students, some of whom are still struggling to pay off loans even as they approach retirement age. In response to the coronavirus crisis, on March 25, 2020, the Federal government passed the CARES Act, which provides six months of financial relief for students who carry federally-issued loans. The act suspended payments and stopped the accrual of interests on qualifying loans. It also halted collection activities on student loans that are in default. If it is not extended, the program will expire on September 30, 2020.
But the CARES Act does not offer relief for all kinds of loans—just those extended by the Federal government. Many students carry a mix of debt that includes private loans issued by financial institutions or colleges and universities they attended. Depending on an individual’s circumstances, student loan refinancing may be a single strategy that makes sense for all student debt or just a portion of it. And the best time to refinance might be right now.
The coronavirus crisis has shaken up financial markets in innumerable ways. You might think that it would be harder than ever to borrow money given the uncertain state of the economy. But that’s not the case. Due to the lowering of the Federal Reserve rate, banks are able to borrow money less expensively right now. Changes in the cost and yield of 10-year Treasury notes have created a situation where banks can make more money by issuing loans than by investing in T-notes. The best student loan refinancing opportunities out there right now reflect these high-level changes.
It makes sense for anyone carrying student debt to review the rates they’re paying currently on their student loans. For people who have strong credit histories, the loan rates they can secure right now, whether fixed or variable, may be considerably lower than the rates they signed up for when they originally took out their student loans. And that’s a solid reason to consider refinancing.
Some banks are offering variable rates under 2% for refinanced student loans. That’s nearly two percentage points lower than the fixed rate for Federal loans for 2019-2020. But Federal loans come with some benefits not offered by private institutions, including the recently-enacted coronavirus relief package. Federal loans. Federal loan payments are often income-based which is helpful to students who are just beginning their careers. They typically offer more generous forbearance options, too. These are permanent benefits students may not want to give up.
The real financial opportunity for graduates may lie in refinancing private loans. That’s particularly true for people who have strong credit histories, for people whose income has risen since they first took on their loans, and for those whose debt-to-income ratios have improved over the years.
For anyone carrying student debt, it’s a good time to download a free credit report. Before applying to refinance a student loan, applicants should do whatever they can to bring their credit scores up. Resolving unfavorable discrepancies, including duplicate accounts listed, misreported late payments, and accounts in the names of former spouses, are important first steps. Bringing any delinquent accounts up-to-date and paying down high-interest credit card debt can also significantly improve a credit score. The lowest loan rates lenders advertise are reserved for people with excellent credit. Finally, borrowers who are in a position to take on a somewhat higher payment can reduce the lifetime cost of their loans by refinancing into a shorter-term loan than they previously took out.
Susan Doktor is a journalist and business strategist who has lived most of her adult life in Massachusetts. She writes, guest-, and ghost blogs internationally on a wide range of subjects including finance, technology, education, and government affairs.