7 reasons not to refinance college debt


There are definitely benefits to student loan consolidation. Obviously, you’ll only have to worry about one monthly payment, and if your credit is strong, you may be able to find a lower interest rate when consolidating or investing. 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 single repayment schedule for the life of the loan. Federal student loan borrowers can choose a standard 10-year or extended-term repayment plan, but also have the option of taking advantage of unique and potentially cost-effective options such as the Pay As You Earn plan or other repayment options. income-based.

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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 that you have already earned for the income-based repayment plan remission. For example, the Pay As You Earn plan offers the discount of any remaining balance after 20 years of one-time payments. So if you’ve already made several years of payments under the plan, you would effectively start the clock again.

2. You risk losing the possibility of obtaining an adjournment or an abstention.

Private student loan consolidation has become much more prevalent in recent years. However, it is important to realize that there are some hardship options (deferral 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 rock-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 loans at the highest interest rates 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 in your grace period

With most student loans, you have a six-month grace period after leaving school before you have to start repaying 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 already been paying off your loans for some time

When you consolidate your loans, your loan repayment term either starts again or may 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 over 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 loan cancellation after five successful years of classroom instruction, and public service employees can request the cancellation of any remaining balances after 10 years of one-time payments under an eligible repayment plan. Private student loans generally do not have similar rebate programs.

Even if you do decide to consolidate your loans through a Federal Direct Consolidation Loan, it is important to realize 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 spectrum, 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%. Although this is a small difference, it is important to know that you will pay a little more interest as you consolidate.

Also, if you have accrued unpaid interest on the loans you consolidate, it will be added to the principal balance. Thus, your future interest will be calculated on a larger principal balance than before.

Again, there are certainly benefits to consolidating or refinancing your student loans. However, if any of the situations described here apply to you, you might want to think twice.

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