Dealing with student loans can often be onerous. As a result, you might be tempted to refinance your student loans for better terms. It is a real option.
However, you should watch out for the risks of refinancing student loans so that you can safeguard your financial interests.
Before you do though, here are some of the risks that can come up with a student loan refinance.
You Aren’t Guaranteed to Get Refinancing
For starters, you aren’t guaranteed to get refinancing. After all, it is a new loan, meaning that the lender is going to check your creditworthiness to see if it will prove to be worthwhile.
Thanks to this, you can expect your credit score to take a small hit because of the credit inquiry even if you don’t get the loan.
If you want to maximize your chances of getting refinancing, you need to increase your credit score by making your payments on time, paying down your outstanding balances, and showing that you can be trusted with various kinds of financial products.
Please note that a credit score isn’t something that can be fixed within a short period of time.
Beware of Variable Interest Rates
Speaking of which, you aren’t guaranteed to get lower interest rates when you refinance. To name an example, if you get a new loan with variable interest rates, you could wind up with higher payments in the future if interest rates rise.
Due to this, you need to make sure that you understand exactly what kinds of interest rates you are getting before you commit.
Otherwise, lower interest rates in the short run could turn into higher interest rates in the long run.
Lower Payments Can Mean Bigger Costs in the Long Run
Oftentimes, when people choose to refinance, they do so for the purpose of lowering 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 to be an acceptable trade-off.
You’ll Lose Some Government Programs and Protections
The federal government doesn’t exist for the purpose of making a profit. As a result, it is much more willing to offer deferment, income-driven repayment, and other programs that can help out those who are struggling in a financial sense.
Private lenders might be willing to offer similar programs under certain circumstances. However, they aren’t obligated to do so by the law.
Due to this, if you plan to refinance your student loan, you need to be aware of the fact that you will be giving up access to the relevant forms of assistance from the federal government.
If you have either an emergency fund or some other source of financial assistance, you will still have a cushion of safety to fall back on after you refinance.
In contrast, if you don’t, you might be taking on more risk than you can handle.
You Might Miss Out on Future Government Programs
It is a well-known fact that student loans have risen by considerable margins in recent decades.
In turn, this means that there has been a surge of support for various programs to reduce the burden placed upon the borrowers of student loans. There is no real way to tell what will come of that support.
However, it isn’t unthinkable that the federal government will offer student loan relief of some kind in the future. If that happens, someone who has refinanced their student loan could wind up missing out on the potential benefits.
Further Considerations
Still interested in refinancing your student loan? It is a big step, so it is a good idea to read more about the subject.
The better-informed you become, the more capable you should be of mitigating the risks of refinancing student loans.
