Drawbacks Of Student Loan Refinancing

Refinancing student loans is regarded as a dream come true by many borrowers. It is a perfect way to cure debts. According to refinancers, the move would reduce the loan’s rate of interest and make your debts manageable. Nevertheless, do you know that refinancing is a costly mistake in the long run? Apart from mortgage refinancing, student loan refinancing is a common and deadly form of debt. Even though the strategy reduces the interest rate and delights borrowers with many benefits, it has plenty of risks too. And, in this article you will read about the downsides in refinancing student loans.

Drawbacks Of Student Loan Refinancing

Drawback #1 – Making Bigger Repayments

Do you know that student loan refinancing has lots of hidden charges? The benefits devoured by refinancing are more or less temporary. For instance, the 0% balance transfers and reductions will last for a very short time period. Thus, you should make sure you don’t end up paying a bigger sum in the longer run!

Drawback #2 – Bad Credit Scores

When you open and close student loans, you must be very careful with its impact. Opening too many loans will weaken your overall credit figures. Similarly, when you shift between loans, you may reduce your credit score drastically. This is why you must think twice before engaging in a shift.

Drawback #3 – Variable Rates of Interest

Refinancing is often related with different rates of interest. This is another hazard related with student loan refinancing. When you take a new mega loan, it will have a massive impact on your new monthly interest. Sometimes, the interest rate may increase by more than 25%!

Drawback #4 – Increase Loan Duration

Student loan refinancing will undeniably increase the number of years you take to repay a loan. This is because you would reset all your old payments and start a brand new loan. This can be attributed to the expensive nature of refinancing. Always remember that refinancing will spread the loan across a larger duration.

Drawback #5 – Prepayment Penalties

Some lenders will ask for prepayment penalties when you refinance student loans. Before you think of refinancing, you must verify if the current loan comprises of prepayment policies. If yes, this may negate the benefits of refinancing. According to experts, you should wait for some time and analyze your loan carefully before refinancing.

Drawback #6 – Transfer Rates

Now, you must comprehend the fact that refinancing has hefty transfer rates. Most borrowers fail to include this fee in their calculation. As a result, you may end up paying something bigger than the traditional rate of interest. Conversely, you must make sure you verify the presence of any transfer fees before finalizing on student loan refinancing.

Drawback #7 – Cancelled Benefits

Last but certainly not least, student loan refinancing may cancel all benefits that are related to federal student loans. When you refinance with a private lender, you will no longer qualify for government benefits. For instance, you will no longer be a recipient of income based payment benefits.

On the whole, refinancing is not good or bad! The actual worth of refinancing will depend on its numbers!