Home Advertizing services Refinancing Your Student Loans Could Cost You Money

Refinancing Your Student Loans Could Cost You Money

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Interest rates are incredibly low right now. And that makes a lot of people think about refinancing any consumer debt they have.

Borrowers could save a lot of money on mortgages, credit cards and, yes, even student loans. And student loan companies are pouncing on it, advertising and tricking borrowers into lower rates than federal student loans.

But student loan borrowers should think twice before deciding to refinance. In the end, it could cost them dearly.

While lowering your interest rate a few points can save you money, borrowers who refinance lose important benefits that only apply to federal student loans. They may miss out on lower payment options, loan forgiveness, and other important protections for consumers.

One of the most important protections and benefits that federal student loan borrowers enjoy is income-based repayment. The federal government offers several plans that allow borrowers to limit their payments based on a percentage of their income, defined as 150% of the federal poverty line for their family size.

As their income increases, payments increase. But if the income suddenly drops, borrowers are also protected and can reduce their payments appropriately. If borrowers earn too little, they will receive a “payment of $ 0” for that period.

While these plans extend the time it takes for borrowers to repay their loans, they offer a discount on any remaining balance after 20 or 25 years depending on the plan. Borrowers also have the option of forgoing the loan if they face other economic hardships.

These are important protections for borrowers if they lose their jobs or if their income fluctuates. Not to mention that federal student loan borrowers can face off on their debt in the event of death and disability.

Borrowers who refinance private student loans lose these protections. But they also lack other loan forgiveness options, such as teacher loan forgiveness and utility loan forgiveness.

When Congress passed the CARES Act, it suspended payments for student borrowers with federally held student loans for about six months. And this suspension is irrelevant. But private student loan borrowers did not get this benefit from Congress.

Thus, borrowers could significantly reduce their loan principal under the CARES Act if they continue to make payments. And most student loan cancellation proposals associated with coronavirus relief or revival do not include private student loans either. Borrowers who refinance would miss out on any extension of the interest suspension or other potential postponement of coronavirus stimulus measures.

Former Vice President Joe Biden has also proposed student debt relief in his presidential campaign. Of course, the elections are still months away and he might not win. And if he does, that is no guarantee that a bill to cancel student loans would be passed. However, it is still something borrowers should consider.

Certainly, some borrowers might see the benefit of refinancing their student loans. Those with private loans may want to consider it if the terms are more favorable. But those with federal loans should be sure to assess their circumstances to make sure they are making the best financial decision.


Related readings:

What student debt cancellation programs currently exist?

Congressional Budget Office Releases New Estimates for Income-Based Reimbursement


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