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Why You Shouldn't Refinance Your Federal Student Loans

Posted on 2023-04-13 17:06:13 by iNF
Education Student loans federal loans loans refinancing personal finance education financing
Why You Shouldn't Refinance Your Federal Student Loans

As graduates start making payments on their student loans, many will face the question of whether to refinance. Refinancing can be tempting, as it can potentially lower monthly payments and reduce the interest rate. However, it isn’t always the best option, particularly when it comes to federal student loans.

Loss of Benefits

One significant drawback of refinancing federal student loans is the loss of benefits. Federal loans come with a range of benefits, such as the possibility of loan forgiveness, income-driven repayment plans, and deferment or forbearance in case of financial difficulty. Once you refinance a federal loan with a private lender, you lose these benefits as the loan becomes a private one. The lender may offer some benefits of its own, but they are unlikely to match those provided by the government.

Potential Higher Interest Rate

Another reason to think twice before refinancing federal student loans is the potential for a higher interest rate. Federal loans come with a fixed interest rate that is determined by the government. Private lenders, on the other hand, may offer variable interest rates that can increase over time. Even if the initial rate is lower than the federal one, there is no guarantee it will remain so over the life of the loan. In addition, private loans often come with higher fees and other charges.

Limited Repayment Options

Lastly, refinancing federal student loans may limit your repayment options. The repayment plans for private loans are often less flexible than those for federal loans, which offer a variety of options to suit different needs and circumstances. With a private loan, you may not be able to change the repayment plan or postpone payments as easily as you could with a federal loan. This lack of flexibility can pose a significant risk for borrowers dealing with unexpected financial setbacks.

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