7 reasons not to refinance college debt
There are certainly some advantages to consolidating student loans. Obviously, you will only have to worry about one monthly payment, and if you have high credit, you may be able to find a lower interest rate when consolidating or refinance your student loans.
However, student loan consolidation also has its drawbacks and is not a smart move for everyone. Here are seven reasons why you might be better off leaving your student loans as they are.
1. Repayment options may not be as flexible
If you are using a private student lender To consolidate your loans, you usually agree to meet a repayment schedule for the life of the loan. Federal student loan borrowers can choose a standard 10-year or extended-term repayment plan, but they also have the option of taking advantage of unique and potentially cost-effective options such as the Pay As You Earn plan or other loan options. income-based reimbursement.
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If you get a Federal Direct Consolidation Loan, you are still eligible for these alternative repayment plans. However, it is important to note that by consolidating you will lose any credit you have already earned for the income repayment plan remission. For example, the Pay As You Earn plan offers the discount of any remaining balance after 20 years of on-time payments. So if you’ve already made several years of payments under the plan, you would effectively start over time.
2. You risk losing the ability to obtain a stay or abstention
Consolidation of private student loans has become much more prevalent in recent years. However, it is important to understand that there are some hardship options (stay and forbearance) that are unlikely to be offered by a private lender. These allow you to defer payments if you’re having financial difficulty, so if you don’t have a solid source of income, you might want to think twice before losing this option.
3. You cannot pay off your loans selectively
When you have multiple individual student loans, you have the flexibility to pay off your highest interest loans faster. As a personal example, I have separate student loans for each semester I was in school. These loans have interest rates ranging from 5.75% to 6.75%. When I want to pay extra for my student loans, I have the option of applying the payment to the higher rate loans to maximize my interest savings. If I had to consolidate my student loans, I would lose this option.
4. You are within your grace period
With most student loans, you have a six-month grace period after you leave school before you have to start paying off your loans. Consolidation loans do not have such a window and typically require repayment starting about two months after loan approval. In other words, if you’ve just graduated and applied for a consolidation loan, you need to be prepared to start making payments much sooner.
5. You’ve been paying off your loans for some time
When you consolidate your loans, your loan repayment term either starts again or could get longer. Many borrowers are drawn to consolidation because it often results in a lower monthly payment. However, you will end up paying off your loans for a longer period of time, especially if you have already been paying off your loans for a while.
6. You work in the public service or you are a teacher
Federal student loans have pretty generous forgiveness programs if you qualify. Teachers can request up to $ 17,500 in loan forgiveness after five years of successful classroom instruction, and public service employees can request the forgiveness of any remaining balances after 10 years of on-time payments in a eligible repayment plan. Private student loans generally do not have similar forgiveness programs.
Even if you decide to consolidate your loans through a Federal Direct Consolidation Loan, it is important to understand that any progress you have made towards Public Service Loan Cancellation (PSLF) will restart the business. 10 year clock.
7. Your student loans may have a lower interest rate than you can find elsewhere
If you are applying for a consolidation loan from a private lender, your new interest rate will be based on factors such as your credit history, repayment term, and the interest rates currently available from your lender. Your federal student loans have a fixed interest rate that is usually on the lower end of the scale, so there’s a good chance you won’t find a better interest rate through a private lender.
On the other hand, if you are using a Federal Direct Consolidation Loan, a weighted average of the interest rates on your loans will be taken and then adjusted upward by 0.125 percent. While this is a small difference, it’s important to know that you’ll pay a bit more interest when consolidating.
Additionally, if you have any unpaid interest accrued on the loans you consolidate, it will be added to the principal balance. Thus, your future interest will be calculated on a higher principal balance than before.
As a reminder, there are certainly advantages to consolidating or refinancing your student loans. However, if any of these situations discussed here apply to you, you might want to think twice.
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