How to Handle a Student Loan Refinance While Unemployed

The effects of COVID-19 has made us think about many things. Losing your job or experiencing a drop in income are at the top of the list.

This isn’t the most fun to think about, but it makes sense to put some thought into what would happen if you lost your job so you can be prepared.

The reality is that your job stability is unpredictable — not just during the pandemic, but at any time. Sometimes, it’s due to a bad, overall economic situation, and sometimes it’s something specific to your employer.

Having student loans, a mortgage, a car payment, and other debt means that losing your income is more than just figuring out how to put food on the table.

If you think you might become unemployed, student loans can still be managed. Planning ahead might provide some much-needed relief so you can focus on more important things than student loan repayment.

How to handle federal student loans

Federal student loans have incredibly flexible loan repayment options. This is a major advantage during a job loss, helping you focus money on other areas of your finances.

Federal loans offer forbearance or deferment if you are in financial difficulty, but you might not even have to take that step. You could choose an income-driven repayment plan instead.

When your monthly payment is based on your income, your student loan payment can be adjusted downward if your income drops. It can even get recalculated to a $0 monthly payment if you’ve lost your job.

If your student debt is more than your salary, then chances are that income-driven repayment might be a solid long-term repayment strategy anyway. In the event of unemployment or if your earnings are reduced while on income-driven repayment, contact your loan servicer and let them know that your income dropped, and they’ll adjust your payment.

Refinancing federal loans

If your annual income is more than your federal student debt and you’re not planning to go for Public Service Loan Forgiveness (PSLF), then refinancing could be a solid long-term strategy.

However, you might not want to refinance while unemployed or if you think you could lose your job. In almost all instances, a refinance during a job loss (or anticipated job loss) is a bad idea.

Refinancing federal loans turns them into private loans. After that happens, you now owe a bank rather than the federal government. Plus, private loans need to pay back the loans in full no matter what. The worst part is that flexible repayment options and any type of student loan forgiveness are gone for good.

Bottom line, even if refinancing is a solid long-term strategy, don’t refinance yet if you could lose your job in the near future.

How to handle private student loans

Private student loans aren’t nearly as flexible as federal student loans. Once you agree to the terms, the bank holds you to your payments. It doesn’t really matter what happens with your financial situation.

But if you already have private student loans, then a refinance while unemployed could be a solid option to get more favorable terms. Lowering your required payment would be helpful in that situation.

Private student loan refinance during job loss

Here’s how it could work. Let’s say you have $100,000 in private student debt at 5% with a 10-year term. Your monthly payment is about $1,060 per month, and you’re earning six-figures so your debt-to-income ratio for the private debt is relatively low.

Hypothetically, let’s say you apply and get offers for 3.5% for a new 10-year loan or 4% for a 20-year loan. The monthly payment for the 10-year loan would be $989 and $606 for the 20-year loan.

Either way, it makes sense to refinance because both rates are lower than what you’re currently paying. However, refinancing to the 20-year term makes a whole lot of sense if you think you could lose your job. It lowers your required payment by $454 per month or 43%.

The bottom line is that refinancing private student loans makes sense right now for a few reasons, especially if you might lose your job:

• Rates are at or near historic lows right now, so chances are you can get a lower rate regardless of what your current terms are.
• Extending to a longer-term (e.g. 10 to 20 years) can reduce your required payment, giving you breathing room if your job is in danger.
• Some refinancing companies offer forbearance between 12-36 months if you need it, which might not be the case for your current arrangement.

It’s best to refinance your student loans before losing your job. You should be offered much more favorable terms with proof of income rather than waiting until your income drops to $0. If you wait until after losing your job, banks are less likely to lend to you without a cosigner — if at all.

I highly suggest checking out our cash-back refinancing options to see if you can get a lower interest rate and better terms. You’ll also see which companies offer forbearance.

Should you refinance student loans if job loss is looming?

If you think you might become unemployed, student loans don’t have to be a burden for you. Start preparing for it now.

Don’t refinance your federal student loans. Explore income-driven repayment programs (like PAYE, REPAYE or IBR) instead, because your payments will adjust to your income.

Definitely explore refinancing your outstanding private student loans if you think you could lose your job, get favorable terms, and lower your private student loan payments. Secure this option while you still have a job.

A key point here is that you should have a clear long-term student loan plan in place if you have six-figure student loan debt. This plan should set you up to save as much money as possible and set you up for long-term financial success, too.

If you have a bunch of student debt and want to find the best way to repay it, while also preparing for a job loss, we can help you. Get a customized student loan plan in just one hour.

Get a Student Loan Plan