Should I Refinance My Federal Student Loans Before The Moratorium Ends?

The federal student loan moratorium is set to end May 1, 2022. Loan payments as well as interest are set to resume after that. The question on most borrowers’ mind right now is: ‘Should I refinance my federal student loans before the moratorium ends?’.

It’s not surprising that everyone’s got refinancing on their mind. Interest rates are the lowest they’ve been in years. Anyone who refinances now will be able to lock in the lowest interest rates till the debt is cleared. The lower interest rate translates to thousands of dollars over the life of their loan.

However, despite the strong appeal of lower rates and substantial savings, there’s one potential downside to refinancing. And it’s a major one. What if the current federal relief gets extended again after May 1, 2022? It has been extended 4 times already. Another extension is a possibility. But nobody knows for sure and nobody can give you a definitive answer.

If the forbearance doesn’t get extended, you’ll lose out on interest savings if you refinance. On the other hand, if it does get extended, you’ll lose out on the interest waiver if you’ve refinanced your federal student loans.

Whether or not to refinance federal student loans before the moratorium ends is not an easy decision. It requires careful consideration and planning. Understanding how refinancing works and weighing the pros and cons of refinancing federal student loans can help.

should i refinance my federal student loans

How Student Loan Refinancing Works

Refinancing involves giving up your existing student loans and taking on a new loan instead. When you refinance, the lender pays off your old loans and offers you a new loan with completely different terms and a new interest rate. The new interest rate is based on prevailing market rates and the applicant’s financial credentials.

Borrowers choose to refinance their student loans for several different reasons.

The most common reason for refinancing is to save money with a lower interest rate. Other reasons include lowering the monthly payments to make them more affordable or increasing the monthly payments to pay off the debt faster.

Under normal circumstances, your decision to refinance student loans would depend solely on your refinancing goals. However, at this time, you also have to take into consideration the ongoing forbearance. While the loan payment pause is in effect, you don’t have to make payments. Additionally, interest has been waived too so your loans don’t attract interest either. So the question remains, should you refinance your federal student loans before the moratorium ends?

Here’s a look at the pros and cons of this option.

Pros Of Refinancing Federal Student Loans Before The Moratorium Ends

Let’s get right down to the biggest reason for refinancing now. Interest rates were at historic lows around the end of December 2021. They’ve gone up since then but only marginally and are still lower than they’ve been in years.

If you refinance your student loans now, you’ll get the lowest interest possible on your loans. Having a good credit score and stable income will help lower the rate even more. This low rate will stay unchanged through the life of the loan regardless of how much interest rates go up through the years.

Another important thing to note is that the current low market rates won’t be applied to your current loans. Your current loan rates were set when the funds were disbursed and they remain the same till you clear the debt.

When payments resume on May 1, 2022, you’ll pay the same interest rate that you were paying on the loan prior to the forbearance. It’s almost certain that the rate will be much higher than what you’d pay on a new loan.

Getting a lower rate on your loans is good enough reason to refinance. You’ll save a substantial sum in accrued interest over the loan term. Even a small rate drop can mean thousands of dollars in savings.

Cons Of Refinancing Federal Student Loans Before The Moratorium Ends

Before you rush off to refinance your federal student loans, you must take time to understand the consequences of this action.

The first drawback is that the federal government doesn’t offer refinancing. If you want to refinance your federal student loans, you’ll have to do it through a private lender. As a private loan, it won’t have any of the protections and benefits associated with the original loan. That means you’ll lose access to income-based repayment plans, forbearance and deferment options, and potential forgiveness if you qualify.

The second drawback is that the payments and interest become due within a month from the refinancing completion formalities. You’ll lose the payment pause and interest waiver benefits. So, you should proceed with caution if you cannot afford to start making payments immediately.

A Final Thought On Whether To Refinance Federal Student Loans Before The Forbearance Ends

This is no easy decision. There’s no one solution that’s right for everyone. Most financial experts suggest that it may be best to wait until payments resume to make a final decision. Even then, you should only consider refinancing if you’re absolutely sure that you won’t need the federal student loan protections anytime in the near future.

In general, you should consider refinancing federal student loans only if:

  •  You’re earning a steady, high income and are sure you won’t need the protections associated with the original loans.
  •  Your credit score is good and you qualify for a lower interest rate.
  •  You want to increase your monthly payments and pay off the debt earlier.

Don’t consider refinancing federal student loans if:

  •  You don’t have a steady income or your income is low and you may need the federal loan protections to fall back on.
  •  Your credit is bad and you don’t qualify for a lower interest rate.

It’s a good idea to consult with a qualified financial advisor before making the huge decision to refinance federal student loans before loan payments resume.

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