Refinancing a student loan can be a great way to save money, but it’s not always the right solution. In some cases, refinancing may even make your situation worse. This article looks at some of the potential downsides of refinancing student loans. So, scroll down to learn more.
Potential loss of borrower protections
How does refinancing student loans work? When you refinance your student loans, the lender needs to consider whether or not you have the ability to repay the loan. The lender also doesn’t consider your credit score, income and assets, employment history or other factors.
Advisors like Lantern by SoFi say, “A Pvt lender repays your loan debt and sets up a new loan.” These are all considerations that would be made if you applied for a traditional home mortgage loan.
Possibility of higher rates in the future
While refinancing student loans can save you money in the short term, it’s important to remember that interest rates are subject to change. This is true regardless of whether or not your loan is a fixed-rate or an adjustable-rate one.
If interest rates rise, your payments could increase, making it more challenging to repay your student loans over time. The federal government can change rates at any time, so if they decide to raise them again after refinancing with another lender, this could affect your ability to pay back what you owe on time with lower monthly payments than before.
Increased monthly payments
Refinancing student loans will increase your monthly payments, sometimes by as much as 10%. This is because the interest rate you pay on a refinance loan is often higher than the current rate on your original loan.
The longer you have the loan and the lower that initial interest rate, the more money you save over time— therefore, the less likely it is that refinancing makes sense financially.
The amount of money saved depends on how much interest you pay while paying off your original debt and how much of an increase in monthly payment occurs after refinancing.
For example, if someone were to refinance their federal student loans at a 5% lower rate for 10 years instead of making payments for 20 years (the standard repayment term), they would save $27,000 over those two decades. That said, they would also have paid $40k more in total due to increased monthly payments during that time period.
It is not available to everyone
Only some are eligible for student loan refinancing. The rules are different depending on the student loan type and credit score, but most lenders have strict requirements for eligibility. Refinancing is not an option if your credit score isn’t great or your income is low. But you can always try other financial options that work best for you.
It’s always best to research before taking out a loan or refinancing one. Make sure you understand all of the possible costs, benefits and risks involved so that you can make an informed decision before applying for a refinanced student loan.
Nyra handles business research, writing financial documents, news items, articles, and study materials about finances.