The debt-ceiling legislation recently signed into law contained one specific provision regarding student loans. The pause on federal student loan repayment obligations, as well as the suspension of interest, is set to finally come to an end on Aug. 30, after more than three years.
With almost $1.8 trillion in outstanding student loan debt in the United States, it's fair to say that resuming student loan payments could be a financial shock for millions of people. So should you refinance to try and save some money before interest and payments kick back in?
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What happens on Aug. 30 with student loans?
As mentioned, according to the recent debt-ceiling deal, Aug. 30 is the official end of the repayment and interest pause that has been in effect for well over three years. However, there isn't much that actually happens on Aug. 30 regarding your federal student loans.
There are two important events to know, both of which occur after Aug. 30. First, interest will start accumulating once again on Sept. 1, so if your goal with refinancing is to lower your interest rates (more on that in a bit), this is a key date to keep in mind.
The other important event is the actual restart of student loan payments. While interest will start accumulating on Sept. 1, loan payments won't actually be due until October. The exact due date could vary from borrower to borrower, but at the earliest, your first federal student loan due date in more than three years could come on Oct. 1.
Who can benefit from refinancing student loans?
I recently wrote an in-depth look at who could potentially benefit from student-loan refinancing, and it is generally limited to borrowers who already have private student loans or federal student loans and fit into all three of these categories:
- Great credit score: Private student loan refinancing companies take borrowers' credit scores into account when approving loans and determining interest rates. So to save money on interest, you or a co-signer will need to have excellent credit.
- High interest rates: Federal student loan interest rates depend on the year the loan originated, and this could be a big factor in whether refinancing is worthwhile. For example, unsubsidized federal loans for the 2011-2012 school year had a 6.8% interest rate. However, for the 2016-2017 school year, the rate was just 3.76%, making it less likely to find a lower rate when refinancing.
- High income: There are some big benefits of having federal student loan, especially income-driven repayment plans and forgiveness plans such as Public Service Loan Forgiveness (PSLF). And if the Supreme Court gives the Biden administration's forgiveness plan the green light, only federal loans would be eligible. Borrowers who could benefit from these are almost always better off keeping their federal student loans.
To be clear, there's no harm in looking. Many student-loan refinancing companies will allow borrowers to check their interest rate and term offers with no impact to their credit score, and with a quick preapproval form. So if you have a strong credit history and are unlikely to qualify for any form of loan forgiveness, there's no harm in seeing what you could get. But for most student-loan borrowers, the combination of the benefits of federal student loans and the relatively high-rate environment we're in will make refinancing less than attractive.
If you shouldn't refinance, what should you do?
The takeaway is that most federal student loan borrowers will be better off not refinancing their student loans -- at least in the current high-rate environment. However, that's not to say that you should do nothing between now and Aug. 30. If you have federal student loans, here's a quick to-do list for you:
- Contact your loan servicer or use fedloan.gov to find them if you aren't sure who your loan servicer is. Several major servicers exited the student loan business.
- Decide what your best payment option is. Your servicer and the Department of Education have several different repayment options, including income-driven plans, which can make repayment more affordable.
- Make a new budget and try to adapt to the additional expense of your student loan payment before it actually becomes due.
So while you shouldn't necessarily refinance your student loans before Aug. 30, there are still some steps you can take to set yourself up for success once interest and payments start up again.
