Student Loan Refinancing Tips for a Recession

While a recession is difficult for any age demographic, it can be especially challenging for young Americans paying off their student loans. An economic downturn usually results in lost jobs and reduced salaries, which is magnified for those who haven’t established a lot in savings (or an emergency fund) and need to pay student loans while juggling other monthly bills in their budget. 

Luckily, there are relief plans in place for federal student loans at times of economic distress. These plans can include anything from forbearance and deferment (i.e., postposing of monthly payments), to interest rates being frozen, to loan forgiveness. 

For private students loans, however, borrowers are usually only able to postpone payments during a recession, while still having to pay accruing interest. In these instances, student loan refinancing may be a good option due to some key benefits.

Lock in a Reduced Interest Rate

A recession can negatively affect the economy in numerous ways, although there are some silver linings. One is the lowering of interest charges, which is usually triggered by the Federal Reserve slashing its rates. Student loan refinancing rates are typically low, but can drop even further during a recession, creating an ideal opportunity for borrowers looking to pay less in interest and more toward their student loan balance.

Student loan refinancing also allows consumers to consolidate multiple loans, which may all have higher interest rates than the one they could ultimately lock in with a new lender. It’s important to weigh all of the options available, however, as different lenders may have different plans in place that factor interest, loan term, and other pertinent details. 

Private Loan Relief Plans

Even though private lenders charge interest during a recession, they do have programs to accommodate consumers looking to benefit as much as possible when financial uncertainty looms. In addition to obtaining a lower interest rate, borrowers who refinance may still be able to defer payments for a specified period of time. These deferment periods typically won't count toward the lender’s existing forbearance limits, meaning borrowers will still have the opportunity to postpone payments down the line for reasons not related to a recession. 

In addition, some private lenders may also waive late payment fees and penalties for the duration of an economic crisis. While borrowers are able to consolidate both private and federal student loans through refinancing, it is important to factor in all of the federal programs available, which are forfeited when a federal loan is refinanced through a private lender. 

Options for Refinancing Eligibility  

While interest rates are lower during a recession, consumers pursuing student loan refinancing will still need to consider their financial health when trying to lock in the best rate and terms available. Borrowers with strong credit scores will be able to obtain the most competitive rates, but those who don’t have the best credit should not fret. Most refinancing lenders allow for co-signers, which would allow a borrower’s parent or other guarantor (who does have a strong credit report and score) to assist them in getting approved for a low rate. 

It may seem overwhelming and scary at first, but there are options available for people struggling with student loan payments during a financial crisis. Student loan refinancing is particularly beneficial for borrowers with private loans, as they can obtain lower interest rates without having to forego the protections and perks of federal student loans. It’s all a matter of comparing the offers available, to ensure you find the student loan refinancing option that best fits your needs.