Refinancing student loans is a common solution for people in financial difficulties, but it’s not always the best idea. Refinancing your student loans can be advantageous in some situations, so it’s important to consider all of the pros and cons before making a decision. In this blog post we will discuss six times when refinancing your student loans might not be such a good idea after all.
Reasons not to refinance your student loans
Before you decide whether to refinance your student loans, there are several reasons to think about carefully before doing so. Refinancing student loans doesn’t change the amount you pay back, so you’ll still be required to make regular payments. By refinance, you can expect to save some money on your repayments, but your credit rating may suffer due to the fact that you might have to borrow more than originally agreed upon. If you plan to use the loan to pay for additional expenses, such as a deposit on a home, it may be best to let your student loans stay as is and don’t refinance them. Refinancing also exposes you to an unknown amount of risk. If you lose your job or business profits fall, the outstanding loan balance may be deducted from your income.
You have other debt
This is one of the main reasons why refinancing your student loans is not always a good idea. Generally, people would rather pay off their debt than take on new ones, but the primary purpose of student loans is to help you pay for your university education. If you have other debts you would rather pay, there may be no harm in refinancing your student loans. You’re not sure how long you will be in a temporary job What happens if you have to change jobs frequently? Will you always be able to pay your student loans if you have to find another steady source of income? Will you always be able to take a break from paying your loans if you’re feeling uncomfortable in a job?
Interest rates are high
How can refinancing student loans help? Good news! Many student loan refinancing companies use interest rates that are significantly lower than those set by the National Collegiate Student Loan Trust (NCSLT), the company which previously serviced your student loans. You can have more than one student loan with different lenders, and the lower rates paid by the refinancing companies mean that your monthly payments will be a bit lower, saving you some cash. How will you be paying your student loans in the future? If you refinance student loans, you will probably have to keep making payments to the new company. If you think that you won’t need a lot of cash to spend on travel, vacations and luxuries, refinance your loans now.
Your job is unstable
If you have a fluctuating income, refinancing student loans can make things even worse. The rates on student loans are set in relation to your income, so if you are working in a job where you are earning a salary, you will only benefit from your loan refinancing if the new fixed rate is better than the fixed rate on your existing loan. If you are living with parents and are struggling to make ends meet, it may be better to refinance your student loans rather than taking on more debt, especially if you are starting a family. Refinancing means extending your loan period You may be able to apply to refinance your loan within the first five years of taking out the loan. If you can afford to repay the loan within that time period, then this might be a good solution.
You don’t understand the loan refinancing process
If you’re a first-time refinance customer, you don’t fully understand the terms and conditions of your loan. It’s important that you thoroughly read the entire refinancing process before making a decision. If you’re not careful, you might make a decision that will have a negative impact on your finances. Before refinancing your loan, you should compare the current interest rates with what you can get with another loan. You should make sure that the potential loan will be affordable for you and your lender. It’s also worth making sure that the new loan is in line with the lender’s policy and terms. Reason you think you won’t be able to find another loan The loans to refinance are managed by the lender. They will be able to find a new loan with more favorable terms.
You can’t manage your debt
One of the main reasons why people have student debt is to finance their studies. This was the most common reason for taking out loans, but the situation has changed and is becoming less common. It is now more likely that students get access to a loan because their parents can provide some cash. However, if this is the case, you still need to manage your debt properly. You shouldn’t have extra spending money on a student loan, and you should use other resources to pay it off if you don’t have extra income. If you struggle to keep up with your repayments, you might want to consider looking into a different loan. You can’t afford the repayments If you can’t afford your loan repayments, refinancing your student loans might not be the best option for you.
You’re not saving enough
If you plan to invest in something with a high rate of return, such as a growth stock, and you want to use your refinance to pay off some student loans, you’ll want to be sure to make the new loan payments the same amount you were paying before. For example, if you’re planning on putting all the money you get from refinancing into an investment account and not using it to pay off your student loans, then you’re not saving enough. Consider that, if you put $1,000 per month into an investment account at a 5% annual rate of return, by the time you’re in your 60s you’ll have $7,000, which is over $100,000 more than you would have with the student loan refinanced.
Every person’s situation is unique, so the following examples and our advice are simply illustrations of the possible issues you might face.