How to Manage Student Loans During Uncertain Times

Molly Carapiet, VP of Eagle Lending Product and Operations, First Republic Bank
March 30, 2020

The roughly 44 million Americans struggling with student loan debt may receive relief from several initiatives, including the CARES Act passed on March 27, 2020. The CARES Act suspends all payments for federal student loans until September 30, 2020. Interest will not accrue during this time period.  

However, the federal student loan suspension of payments only applies to federal student loans under the Federal Family Education Loan Program (FFELP) and Direct Loan (DL) Programs, not private student loans.

For borrowers with federal student loans and who are able to, some may continue making principal only payments on their federal student loans through September to reduce the total amount they owe. For other borrowers, especially those with private student loans, it may make sense to refinance, or combine their student loans into one payment at a lower interest rate, to save more and get out of debt faster. The uncertain economic landscape may raise several questions:

  • If interest rates are low, does it make sense to refinance my student loan now?
  • Should I wait and see if student loan debt is canceled?
  • How do I pick the best student loan refinancer? Aren’t all lenders the same?

Here are some considerations for how to handle student loans in a fast-moving, ambiguous environment.

Evaluate your options

First, determine whether you have a federal student loan or a private student loan; student loans come in many shapes and sizes, and the regulations for them can be different as well. There are many ways to relieve student loan debt, so it’s important to understand all the options available to borrowers and make the best choice for your financial situation.

Refinancing

  • What it is: Student loan borrowers refinance through a private lender that will pay off their existing loans and give them a new loan at a lower interest rate. Individuals can refinance both federal and private loans; it doesn’t cost anything to apply, and borrowers may be able to reduce their monthly payments or pay off their debt faster. Borrowers can refinance multiple times.1 If borrowers refinance their federal student loans they will give up any benefits associated with those loans.

Deferment or forbearance

  • What it is: Student loan borrowers who are facing short-term financial hardship may qualify for deferment or forbearance, which temporarily suspend payments on a loan. Under a deferment, interest may or may not accrue, depending upon the loan. However, under a forbearance, interest will continue to accrue and then be capitalized (the accrued interest will be added to the principal balance) when the borrower re-enters repayment.
  • What’s changed: The CARES Act signed into law on March 27, 2020 is a deferment and, as such, interest will not accrue and balances will not increase during the period of deferment.

Consolidation

  • What it is: A direct consolidation loan, which is offered through the U.S. Department of Education, allows borrowers to combine multiple federal education loans into a single federal loan. The interest rate on a direct consolidation loan is the weighted average of the interest rates on the loans being combined, rounded up to the nearest 1/8 of a percent. Borrowers who consolidate their loans may not necessarily lower their interest rates or payments. In addition, borrowers can only consolidate their existing loans once.

Income-based repayment

  • What it is: An income-driven repayment plan for federal student loans that sets a borrower’s monthly student loan payment at an amount that’s intended to be affordable, based on income and family size. Although it lowers the monthly payment, it doesn’t lower the interest rate, which means that a borrower may ultimately owe more money because interest still accumulates.

Forgiveness

  • What it is: In certain situations, borrowers can have their federal student loans forgiven, canceled or discharged.
  • What’s changed: There are several government proposals to cancel student loan debt, although nothing has been confirmed. Under the CARES Act, for the purposes of loan forgiveness, each month in which the loan payment is suspended is counted as if the borrower had made a payment that month. This means no disruptions would occur toward loan forgiveness obligations.

Assess your finances

Every borrower’s financial situation is unique, but the below factors may indicate that you’re a strong candidate for student loan refinancing:

  • Stable source of income during this time of uncertainty
  • Excellent credit, with a FICO score of 750 or above
  • Short-term savings to cover six months of expenses during this time of uncertainty
  • A significant debt amount of $25,000 or more, which means you could benefit more from a lower interest rate
  • High interest rates on student loans (many professionals who completed graduate school in the past decade took out student loans at rates above 6%)
  • Not planning to use loan features such as income-based repayment or forgiveness provisions

Plan for the future and get a trusted, stable partner

In times of uncertainty, it can be helpful to develop a plan of action so that your finances are secure in the short and long term. However, if you’ve chosen to refinance, here are some considerations for choosing the right financial partner for you:

  • Low fixed rate: By refinancing student loans, borrowers can lock in a low fixed rate for a specific term, potentially reducing their interest rates and/or monthly payments over the life of the loans.
  • Speed: Student loan borrowers may be able to get out of debt faster through refinancing. Ask a prospective student loan refinancer if it offers a prepayment bonus if you’re able to pay off your loan more quickly than anticipated. 
  • Service: Not all lenders or loan servicers are created equal. Borrowers who refinance through First Republic Bank2 have a dedicated personal banker who works with you to address your specific financial goals — beyond your student loan debt.
  • Financial strength and security: Safety and stability are crucial during tough times. Look for a financial partner with strong credit ratings, robust capital levels, exceptional asset quality and substantial liquidity.

Building a relationship with a trusted banker who can provide personal service and guidance allows you to focus on your career and loved ones, while having the confidence that your financial goals are on track. A banking partner can model scenarios for paying down student loans or build a team to help you navigate your next move in a rapidly shifting environment.

1 Terms and conditions apply. The terms of this loan may differ from your current loan(s). For example, this loan does not contain special features such as forbearance periods or income-based repayment plans available for some student loans. This loan may not be dischargeable in bankruptcy. This product is not available in all markets. For a complete list of locations, visit firstrepublic.com/locations. This is not a commitment to lend or extend credit. Contact your legal, tax and financial advisors for advice on deciding whether this is the right product for you. First Republic Bank does not refinance existing First Republic Student Loan Refinance loans.

2 Product is not available in all markets. For a complete list of locations, visit firstrepublic.com/locations. Applicants must meet a First Republic banker to complete paperwork. This is not a commitment to lend, all loans are subject to First Republic’s underwriting standards. Applicants should discuss loan terms, conditions and account details with their banker.

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