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    How To Better Manage Your Student Loans During COVID-19

    Student Loan During Coronavirus

    It is no hidden fact that coronavirus has temporarily devastated the global economy. The initial analysis conducted by McKinsey at the outset of April 2020 estimated that up to 53 million jobs in the US alone were vulnerable. This includes reduction in work hours, permanent layoffs, and temporary furloughs. 

    More than 26 million Americans have filed for unemployment to-date. Owing to this, the Federal Government has declared a state of emergency and launched relief measures for loan holders beginning March 13th, 2020.

    If you are facing difficulties managing your ongoing student loan repayments, here are some things that you should know.

    Federal Vs Private Loans

    The Trump Administration launched the CARES Act to help borrowers manage student loan repayments. However, the challenge is that most of these benefits mostly apply to federal loans owned by the Department of Education (ED).

    Financial firms have been encouraged to help customers at this time of need by the Consumer Financial Protection Bureau and other financial regulators. Under this guidance, many lenders have already posted the guidelines for temporary deferment or forbearance on their websites. Here are the key takeaways from the CARES Act:

    • All Federal Student Loan and/or Parent Loan holders aren’t required to make any payments on their outstanding balances from March 13 until September 30, 2020. Private student loans and Federal Perkins Loans don’t qualify for this benefit. During this period, no interest will be accrued and there won’t be any additional charges on your balance.
    • If you have a private student loan outstanding, you should reach out directly to the lender. Generally, most private lenders are agreeing to defer payments for a certain period, but there is no clear benchmark about the interest and charges.
    • If you have a Federal Loan and wish to keep making payments, any amount that you pay during this period will be directly applied to the outstanding principal balance, thus allowing you to quickly clear off the loan and reduce the total interest amount paid.

    Should You Refinance?

    If you have a good credit score and haven’t defaulted on payments, refinancing your private student loan might be the right decision during these tough times. Most importantly, the benchmark interest rate has been cut, making it increasingly possible to attain a better rate than your current loan if you have strong creditworthiness.

    For instance, if you have a loan of $20,000 for 10 years at 8.75%, you’ll be paying around $250.65 per month. That amounts to interest of almost $10,000 over the life of your loan. Yet, if you refinance during this crisis, you might be able to access a lower rate given the average refinance rate currently is between 1.58% to 6.45%. Even if you select the same term and get a rate of 6.45%, you’ll still save more than $3,000 on the total payable interest.

    Hence, there is no better time than now to refinance your private student loan. However, if your outstanding balance is less than $10,000, it is best to stick with your current lender.

    The Advantages Of Refinancing Right Now

    These are unprecedented times, and you can actually benefit by refinancing your existing loan. Here are some notable advantages of refinancing right now:

    1. Lower Interest Rates - To qualify for the best rates, you need to have stellar credit, a low debt-to-income ratio, stable income, and meet all other eligibility requirements. Depending on these factors, you can access rates as low as 1.58%. Check with multiple lenders to understand what each has to offer and accordingly make your pick. Owing to the COVID-19 crisis, there are high chances that you’ll access a rate that’s comparatively lower than what you’re currently paying. This can help you save enough to manage other expenses during this challenging period.
    2. Better Repayment Terms - If you receive a lower interest rate, you’ll have excess funds that you can use to quickly repay the new loan. Moreover, if your credit score is on the higher side of 600 you’ll be able to negotiate flexible repayment terms. This will deliver immediate savings over the interest that you would have paid otherwise.
    3. Improved Credit Score - When you have a lower monthly repayment, it also lowers your debt-to-income ratio, thus making you eligible for other loans and mortgages. You’ll be able to pay off the debts on time, which in turn will contribute to credit score improvements.

    Bottom Line

    Given the unfolding economic hardships faced by many borrowers, most lenders are willing to negotiate suitable rates and terms for unpaid student loan balances. If you meet the requirements, this is the right time to refinance your student loans and save money in the process.

    However, make sure that you compare multiple lenders to figure out the best rates. If there are multiple lenders offering similar rates, check other add-ons like repayment terms, forbearance, and deferment options before refinancing the loan. 

    Most importantly, keep an eye out for the changes in rates as this is happening quite frequently these days.