Refinancing your student loans seems appealing at first glance. You, hopefully, get a lower interest rate, multiple loans turn into one, and it’s supposed to be the best move for reducing your student loan payments and paying them off faster, right? Wrong.
Before you decide to refinance, you should know these 3 facts that tell the truth that student loan refinancing isn’t always the best plan and isn’t the only way to get your student loans under control.
1. Refinancing Can Eliminate/Limit Flexibility and Options for Help.
When you refinance a federal student loan loan, the loan is then owned by a private lender. With private lenders many of the benefits and assistance options offered through federal loan providers disappear. These include:
- Loan Forgiveness – If you’re in one of the many professions who are eligible for Public Student Loan Forgiveness, the option to have your loans forgiven after 10 years of eligible repayment goes away.
- In-School Deferred Payments – If you continue your education, with federal loans you are eligible for deferment or being excused from paying while you’re in school. That option is not available with private lenders.
- More Options – Every year the government has the option to create new ways to help borrowers with student loans. Refinancing through a private lender means losing those options.
All of these benefits are lost when you refinance federal loans for private loans, making it a risky move for some borrowers for the long term.
2. Interest Rate “Surprises”
The appeal of refinancing a federal student loan is often an advertised interest rate or payment reduction. Unfortunately, many borrowers miss important details like loan types, amounts, and the interest rate(s) involved in the deal.
That’s right rates. Federal student loans have a “standard interest rate,” which means they are fixed, or the same, for the life of the loan. Many private student loan interest rates vary, carrying a lower initial rate. The issue with these variable rates is that they can change at any point and could become remarkably larger over time if there’s no cap – even if they may have a lower initial rate than federal fixed rates.
Over time variable rates can affect repayment time, payment, and, indirectly, a borrower’s ability to make other purchases.
3. Lose the Chance to Use Salary to Lower Payments
In addition to those above, federal student loans have an important option for borrowers who experience an income change or drop – Income Based Repayment.
In the event that your income changes, income based repayment can be a great option for ensuring your loan payments don’t overwhelm your budget. This option disappears when you refinance.
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