Dealing with student loans can often be tricky. As a result, you may be tempted to refinance your student loans for better terms. It’s a real option.
However, you should be wary of the risks of student loan refinancing so that you can safeguard your financial interests.
Before you do, however, here are some of the risks that can come with refinancing a student loan.
You will not receive a guarantee on refinancing
For starters, you are not guaranteed refinancing. After all, it is a new loan, which means that the lender will check your creditworthiness to see if it will turn out to be worth it.
Because of this, you can expect your credit score to take a little hit because of the credit check, even if you don’t get the loan.
If you want to maximize your chances of refinancing, increase your credit score by making your payments on time, paying off your outstanding balances, and showing you can trust different types of financial products.
Keep in mind that a credit score is not something that can be fixed in a short time.
Beware of variable interest rates
Speaking of which, you are not guaranteed lower interest rates when you refinance. To cite an example, if you get a new floating rate loan, you can get higher payments in the future if interest rates rise.
That’s why you need to make sure you understand exactly what kind of interest rates you’re getting before you commit.
Otherwise, a lower interest rate in the short term can lead to a higher interest rate in the long term.
Lower payments can mean higher costs in the long run
Often, when people choose to refinance, they do it to lower their monthly payments.
The problem with this is that lower monthly payments mean longer loan terms, which can mean a more expensive loan in the long run.
Depending on your personal needs and preferences, you may or may not consider this an acceptable trade-off.
You lose some government programs and protections
The federal government does not exist to make a profit. As a result, it is much more willing to offer deferral, income-driven repayment, and other programs that can help those who are in need of it financially.
Private lenders may be willing to offer similar programs under certain circumstances. However, they are not required by law to do so.
Therefore, if you are planning to refinance your student loan, you should be aware of the fact that you are giving up access to the relevant forms of federal government assistance.
If you have an emergency fund or other source of financial aid, you’ll still have a safe pillow to fall back on after your refinance.
However, if you don’t, you may be at more risk than you can handle.
You could miss out on future government programs
It is a well-known fact that student loans have risen by significant margins over the past few decades.
This, in turn, means that there has been a wave of support for various programs to reduce the burden on student loan borrowers. There is no real way of saying what will come of that support.
However, it is not inconceivable that the federal government will offer student grants in one way or another in the future. If that happens, someone who has refinanced their student loan could miss out on the potential benefits.
Still interested in transferring your student loan? It’s a big step, so it’s a good idea to read up on the subject.
The more informed you are, the better able you should be to mitigate the risks of student loan refinancing.