Student Loan Refinancing is a great option when it comes to making your debt repayments more manageable and scoring a lower rate of interest. However, it is important to remember that refinancing a federal student loan can mean losing out on federal benefits such as student loan forgiveness programs and much more. In many cases, borrowers jump into the game without much research which can lead to more hassles.
In this article, we shall discuss the mistakes people usually make while opting for a student loan refinancing
Table of Contents:
- Not Exploring Lender Options
- Not Comparing Different Repayment Plans
- Giving Up Federal Loan Protections
- Refinancing All Your Student Loans
- Not Understanding The Impact Of Variable and Fixed Interest Rates
- Signing Up Without A Cosigner
Not Exploring Lender Options
Interest Rates for Refinancing loans may vary from person to person. A lot of it depends on the customer’s credit score and overall financial condition. What would be a good deal for one customer doesn’t necessarily mean a good deal for another. Hence, it is important that you do not commit to the first deal.
Most borrowers jump into the first deal that they are offered because the first-rate you are offered might already look lucrative since it looks better than your current weighted average interest rate. But the catch is there are other lenders in the market with better offers. Compare with multiple lenders to get the best rates. You can start researching with your local credit union, local community bank before deciding on the best student loan refinancing plans.
Not Comparing Different Repayment Plans
One of the most common mistakes a borrower makes is that they do not compare different student loan repayment plans. Compare old loan terms and interest rates with the new one. Comparing this will give you a fair idea of how much you’ll save on a lower interest rate or shorter repayment term or in case you need a lower monthly payment and how it will affect your monthly budget.
It is important to remember that shorter your loan term, lesser money you’ll pay in interest over time. However, choosing a loan repayment amount that fits your monthly budget is a smart move and highly recommended.
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Giving Up Federal Loan Protections
Refinancing turns your federal student loans into private student loans. As a result, a borrower will lose access to federal benefits like Income-Driven Repayment plans and student loan forgiveness programs. Federal Student loan protections help manage debt in case of situations where you lose your job, your income drops or you go back to college. Refinancing your federal student loan means giving up on your Federal Loan benefits. Borrowers working towards loan forgiveness should avoid refinancing.
However, if you still want to refinance, you may opt for refinancing lenders who offer forgiveness type opportunities. Some private lenders offer flexible repayment terms or forbearance in case of financial hardships. Choose a refinance plan and lender that offers unemployment protection, death and disability discharge, deferment and other protections you might need in the future.
Another important point to remember is that in case you do not want to give up your federal student loan benefits, you can always refinance only your private student loans.
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Refinancing All Your Student Loans
One of the major mistakes a borrower makes is by refinancing all your student loans. It is important to note that refinancing all your student loans may not give you a better interest rate. The interest rate of each student loan should be a deciding factor about which loan should be refinanced and which shouldn’t be.
Federal Student loan interest rate varies by year but once the loan is disbursed, the interest rate of federal student loan is fixed. This is, however, not the case with private student loans. Interest rates for private student loans may vary depending on a borrower’s credit score and financial condition.
Instead of refinancing all your student loans, you can choose not to refinance those loans that already offer lower interest rates. Instead, refinance those loans which have a higher interest rates and refinancing those loans will give a new and lower interest rate.
Not Understanding The Impact Of Variable and Fixed Interest Rates
When you opt for student loan refinancing, lenders will offer you two different rates. One would be with a variable interest rate while the other would be a fixed interest rate. Generally, variable interest rates start out lower than fixed interest rates. However, it is important to remember that variable interest rates can change over the course of your loan term based on the economic climate while fixed interest rate will remain the same. Variable interest rates may affect your monthly payments whereas when you have a fixed interest rate, your monthly payments are predetermined. Review both the options and determine the loan repayment term before taking up the decision to opt for the right interest rate.
Learn more about fixed vs variable interest rates for student loans.
Signing Up Without A Cosigner
One of the biggest mistakes borrowers commit is signing up for a refinancing plan without a cosigner. If you do not have a good credit score, you might not be able to secure a better interest rate. In such cases applying with a cosigner helps. Onboarding a cosigner helps you secure a lower interest rate. The cosigner can be a parent, partner or another person with a good credit history and a strong source of income. However, it is important to make sure that you and your cosigner are both on the same page about the refinancing plan you have opted or want to opt for because if you fail to make payments, your cosigner would be the one facing the consequences.
You can avoid all these mistakes by taking the refinancing process slow. Do your due research, compare the various refinancing plans as well as lenders. While comparing, remember to compare the deals with your current loans. Once you’re through with its mechanism, student loan refinancing is a great move. You could simplify your payments and save on interests in the coming years.