Refinance Your Student Loan At Your Own Risk
Protecting my colleagues from commercial banks that try to take advantage of their lack of financial knowledge was the reason why I started The Investing Tutor. And now I have an opportunity to make a difference by providing easy to understand financial education.
This article focuses on private commercial banks luring students to refinance their federal student loans with the promise of lower interest rates.
** Note: This article and its benefits apply only to Federal Student Loans. **
Okay, let’s dive in!
Over the past year, I’ve watched as private banks have slowly been coming out of the woodwork to offer student loan refinancing to graduates.
In the beginning, I wasn’t concerned, because it wasn’t that many banks. However, recently I’ve noticed an INCREDIBLE spike in banks and financial companies wanting to refinance student loans.
While completing my taxes, I was AMAZED when a tax preparation service wanted to help refinance my student loan. That was the sign I needed — I had to put together an article right away. And help stop the MADNESS.
You have to realize ONE THING: the moment you refinance a federal loan, you lose ALL of the benefits and protection that is afforded to you as a borrower by the Federal Government.
To name a few, this is what you lose if you refinance:
· Over 10 flexible repayment plans offered by the government.
· Extended grace period with $0 monthly payments if you are unemployed.
· Student loan forgiveness. (This can easily cost you tens to hundreds of thousands of dollars)
· Government tax write-off on your loan.
· A possible new loan repayment program (by the Trump Administration)
On the campaign trail, President Trump stated, “We would cap repayment for an affordable portion of the borrower’s income; 12.5%, we’d cap it. And if borrowers work hard and make their full payments for 15 years, we’ll let them get on with their lives. They can just go ahead and they get on with their lives.”
In other words, you pay 12.5% of your monthly salary (if you earn $3000/month, your payment would be $375) and after 15 years your loan is forgiven! This might not be appealing to someone with a $10,000 student loan; however, for a professional with over $100,000 in loans, this program is a gift from God.
If this plan is made public, anyone with a private student loan, or a refinanced loan, won’t qualify. They fell for the lower interest rate pitch by the private bank (I call it “lower interest, higher stress”).
The interest rate reduction of 1% to 3% promised by private banks can never replace the peace of mind you get from a Federal Student Loan.
Commercial banks are PROFIT driven; never forget that.
This is why I believe a federal student loan is better than a mortgage (one pardons you when you are unemployed; the other takes your home if you can’t make the payment).
In 2010, ex-President Obama forced commercial banks out of the federal student loan market. This kept billions of dollars in profits from private banks while easing the pressure felt by graduating students from these commercial banks.
However, recently banks and financial companies are making a comeback. And they are doing it through student loan refinancing.
All of these companies are required, by law, to have a disclaimer, but many of them hide it on the footer of their website or within the pages of lengthy documents.
A majority of student borrowers fail to read the disclaimer, which warns:
“Refinanced loans are private loans and do not have the same repayment options that federal loan programs offer, such as Income Based Repayment or Income Contingent Repayment.”
If you don’t believe me, just visit this website and check the footer of the site.
I encourage you to keep educating yourself about your personal finances. And don’t hesitate to reach out if you have any questions.
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This blog post is not intended to be, and should not be considered to be, individual financial advice. The information shared by The Investing Tutor is for educational purposes only.