Mounting student debt is causing a grave economic crisis in the US. Over the last few years, it has become the second-highest source of consumer debt, surpassing credit card debt, and auto loans. According to the Chamber of Commerce, 60% of US students are under some debt by the time they graduate. These include both private loans and the ones issued by the government.
In 2017, around $1.5 trillion of student loans were owed in the US by a total of 44.5 million individuals. More than 2 million people owed around $100,000, and as many as 0.5 million people owed more than $200,000. As debt and tuition fees continue to rise, fewer people enroll in colleges every year.
To deal with the issue, US students are now considering student loan refinancing more than ever.
In this post, we will discuss whether student loan refinancing can be undone or reversed:
What is student loan refinancing?
According to the finance experts at Forbes, student loan refinancing can help you save up on more than $30,000 throughout your student loan. The exact cost-saving depends on your student loan balance and the interest rate.
When students are unable to pay back their student loans, they can get in touch with a loan officer of a financial advisor to apply for student loan refinancing. This form of refinancing consolidates your federal and state student loan into a single student loan that bears a lower interest rate. In short, you replace your high-interest loan with a low-interest rate loan.
Refinancing has particularly become popular because the COVID-19 financial fallout has caused the interest rates to drop significantly. In fact, it has become ‘incredibly cheap’, as stated by Forbes. Rates dropped to as low as 3.1% for fixed loans and 1.9% for variable loans in February 2020. Over the last year, the Federal Reserve slashed interest rates nearly thrice. As a result, lenders also decreased student loan refinancing rates. This has largely helped students pay off their debt faster.
Can you undo a student loan?
Under usual circumstances, once a student loan refinancing comes to an end, there is no going back. However, you can fix certain mistakes.
When you refinance your student loan, your new lender pays off your existing loan in full. When this happens, the old debt obligation is removed from your books. As a borrower, you’ll now be liable to pay the new obligation to the new lender. Your new lender will require all the information regarding the old lender and the loan. Once the new lender signs the documents and the payment has been sent to the old lender, the loan reaches the point of no return. From this point onward, the borrower can’t call off the refinancing process.
If you feel like repaying the new loan would be a challenge for you and want to stop the process, call up the new lender and ask them to stop. If they’ve already made the payment, you can also call up the old lender and ask them not to accept it. However, there is little chance of success in this case.
This means that you can’t permanently reverse a refinance.
However, there are other options to correct your mistakes. Take a look at an example: if you’ve borrowed a 10-year variable rate repayment plan and later realize that this might be hard to pay back, you can go through the redo process. There is no limit to the number of times a loan can be refinanced. You can refinance your loan whenever you find a more feasible option. There is no application fee and no fees to pay off your student loan before the due date. You can look for another lender willing to offer a 20-year fixed-rate plan and start the refinancing plan all over again.
The only exception
In some cases, the refinancing process is permanent and can’t be reversed. Private refinancing of federal loans is one such example. When you convert a federal loan into a private loan via private refinancing, all the federal perks are gone. The loan will no longer come under any of the federal provisions, and you’ll also lose out on the benefits offered by your old loan. You can’t even seek help from any of the income-driven repayment programs or student loan forgiveness programs. When you combine your old loans into a new loan, some of the terms and conditions pertaining to the old loans still apply. When you consolidate the federal loans, you lose out on these benefits. This could be both beneficial and harmful to borrowers. The exact consequences depend on the borrower’s individual requirements.
The same holds true if you apply for the federal direct consolidation for your federal loan. In this case, the Department of Education closes the old loans under a new direct consolidation plan. For this, you must study the process of federal direct consolidation and understand its consequences well.
There’s no guarantee that a second refinancing attempt will help you nullify your errors and mistakes. The best you can do to mitigate this risk is to seek help from a reliable refinancing option. We also recommend checking the rates offered by multiple student loan lenders before signing the deal. While you’re shopping for lenders, make sure you’re only checking interest rates and not committing to anyone. If you’ve lost your job, some lenders also allow you to pause your payments until you can find some means of income.
Education Loan Finance(ELFI) is a renowned student loan and refinancing service providers in the US. Over the past thirty years, the company has been helping students nationwide repay their student loans on easy terms. The company’s low-interest rates and easy repayment schedules have helped it create a sound reputation for itself. ELFI strongly believes in helping financially responsible borrowers as much as they can.
If you have any more questions about student loans, you can visit the website to learn more about how they work.