What Are the Risks of Student Loan Refinancing? - LoansInfo
Saturday, September 26, 2020
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What Are the Risks of Student Loan Refinancing?

Refinancing a student loan may look like an escape route to finally pay off one debt using another due to its lower interest rate. However, thoughtful consideration has to be given because not all private lenders are the knights in shining armor whose terms will help with your current loan. That is to say, there are certain risks of student loan refinancing which you should be wary of. They will enable you to determine if getting a new loan is worth it in the first place.

What is Refinancing?

Refinancing is the process of getting a new loan from a private lender to pay off your current loan such as a Federal loan. They may all be loans, but the new one comes with the perk of a reduced interest rate which ensures that while your current debt is paid, the monthly or yearly returns you make are lower. Likewise, some of the best lenders have a number of criteria before selecting a borrower to refinance their debt.

When to Consider Getting a Student Loan Refinancing?

There are several factors to consider when getting a student loan refinancing and notable among them, is the reason for getting the loan in the first place. Some of these reasons that have become popular among borrowers include:

  • A  need to release a co-signer of a loan
  • The aim of paying off student loans faster
  • Extending the loan term for another couple of months
  • Saving more money through the lowering of interest rates

Risks of Student Loan Refinancing

Several risks are involved in student loan refinancing and as such, you need to armed before-hand in order to make informed decisions. Some of them include the following:

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1. Difficulties in Making the Expected Returns:

While a lower interest rate comes with a promise of enabling you to pay monthly interest with ease, if you’ve been struggling with your former loan, that may not be the case. Let’s face it, the interest may be lower, but not as low as you may expect to lift the burden entirely. A new loan may come with origination fees, prepayment penalty, and others. Therefore, first, determine your financial standards before venturing in. We’ll soon tell you why that is.

2. Losing Benefits that Come from Federal Loans:

Also worthy of note is the possibility of losing the benefits that accrue to Federal loans. In this case, if you are refinancing a Federal student loan, then some benefits such as loan forgiveness may have just been blown to the wind. Other Federal government programs whose access will be lost include deferment, income-driven repayment, and forbearance. Income-driven repayment, for instance, makes you eligible for a limiting on monthly payments. You could also lose future benefits that are yet to be launched given that student loans in the US have grown to over $1.5 trillion.

3. Varying Interest Rates:

Borrowers of Federal student loans as from July 1, 2006, irrespective of their financial status, college major or even credit score all have the same interest rate. However, moving to a private student loan that has been refinanced by such a company means you will have to rely on a fixed or varying interest rate. For varying rates, the interest will be determined using your credit score. If your income is high and you have a remarkable credit score, then there’s a higher chance of getting a lower interest rate.  The reverse is the case if you’re struggling in the first place.

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Conclusion:

Now that you know the risks of student loan refinancing, you will be able to determine if these risks are worth taking in the first place. Most importantly, losing benefits to programs that may be of help in the near future. Nonetheless, if all measures have been set in place to curb risks, then each of these may be nothing to worry your head about.

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