The Risks of Refinancing Your Student Loans

Refinancing your student loans allows you to take a new loan to pay off your existing student loan. The new loan should be achieved at a lower interest rate, allowing you to save money over time. The main reasons for seeking a refinance are that either the national prime interest rate has dropped, or your personal credit has increased. Either of these scenarios should result in a lower rate. However, there are some disadvantages to refinancing as well.

Credit Score Repercussions

The main drawback with any refinancing, whether it is student loans or other forms, is the negative affect the action will have on your credit score. Lenders provide a loan contract, including interest rate, based on the overall profit they anticipate making on your loan. When you alter the loan, you decrease the profitability of the loan for the lender. Paying off the loan early, known as prepayment, will cost the lender money. As a result, the lender may assess fees against you. The lender will also report the activity to the credit bureaus to warn potential future lenders that you did not follow through with the terms of your contract.

Worse Loan Terms

Your new loan may have a lower interest rate, but are you sacrificing on your loan terms? Interest rate is just one factor when you decide which loan option to sign. Loan terms also involve issues such as loan modification fees, length of the loan, and even when the loan is considered delinquent. For example, a refinancing lender may make money on your loan at a lower interest rate by enforcing a high delinquency payment after only a few days once a payment is due. These methods are slightly predatory, and they represent hidden fees that make your new loan less favorable even at the lower rate.

Missed Opportunities

Refinancing alone is just one of the ways you can modify a loan to capitalize on better terms. While you are considering refinancing, you should also look into other ways to reduce the cost of your loans. For example, you may be able to consolidate multiple student loans into one new loan. If you have loans across semesters or from undergraduate and graduate school, combining them can save money and hassle. You may also consolidate non-student loans, such as car loans and personal loans, to achieve only one debt payment each month. Since you will already be modifying a loan if you refinance, taking advantage of these opportunities will help get you the largest reward.

Federal Loan Refinancing

If you have federal student loans, you should be aware you will have to seek federal refinancing loans. Thankfully, the federal government encourages refinancing and consolidation to help you meet loan payments if you are having difficulty. However, you will not be able to consolidate your federal loans with other private loans. Simply put, federal loans are less flexible in terms of modification. You will need to seek options that are provided within your federal loan program in order to modify the loan.

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