Q&A: Can You Switch Lenders Before Closing?

Many borrowers have problems with their lender’s customer service or lack of it during the loan term. It’s not uncommon for them to ask ‘Can you switch lenders before closing your student loans?’ The answer to this question is yes you can switch loan servicers/lenders before closing either federal or private student loans. But there are a few things you should understand before choosing this option. 

How To Switch Loan Servicers For Federal Student Loans

Student considering private vs federal student loansThe Department of Education contracts a few loan servicers to manage federal student loans on their behalf. When you first get federal student loans, you cannot choose a loan servicer. Instead, you will be automatically assigned a loan servicer to manage your loans. 

All federal student loans have the same interest rates and loan terms, regardless of the loan servicer. These are set by the federal government. No loan servicer can offer lower interest rates or better terms. They don’t have the authority to change any loan terms. So, switching loan servicers will not get you any financial benefits. The only reason to change would be because of bad customer service.  

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There are two ways to switch federal student loan servicers – consolidation and refinancing. 

Consolidation involves combining two or more federal student loans into one new loan. When you consolidate federal student loans, you can choose a new loan servicer as well as a new repayment plan. Your consolidated loan will also have a new interest rate, which is calculated as the weighted balance of your old interest rates. The benefit of consolidation is that the new loan is eligible for all federal benefits and protections. 

Refinancing involves combining two or more federal student loans into one new loan through a private lender. The federal government doesn’t offer a refinancing option so the refinanced loan will now be a private loan. This automatically switches your loan from a federal loan servicer to a private lender. The benefit of refinancing is that your new loan could have a lower interest rate and better terms if you have good credit. The downside is that as a private loan, the refinanced loan will lose all federal benefits and protections. 

What Happens When You Switch Federal Loan Servicers Before Closing?

When you switch loan servicers through consolidation, the loan terms such as the interest rate and payment installments don’t change. However, while the loan terms remain the same, there may be some changes in the payment process. Two things that will change are the account number for transferring the payments and the auto-debit payment instructions. Both these have to be changed to reflect the new loan servicer. In most cases, the payment due date may also change.  

When you switch lenders through refinancing, everything changes. Your federal student loan becomes a private student loan and loses all benefits associated with the original loan. This is irreversible. Once you refinance your federal student loans, they remain private loans until they are paid off. 

This option is recommended only if you’re very sure you won’t need any of the federal protections.

How To Switch Private Student Loan Lenders

Private student loans are funded and managed by private lenders. Every lender sets their own interest rates and other loan terms. Unlike federal student loans, these can vary significantly among lenders. One of the most common reasons for switching private lenders is to get better terms. However, you can’t just keep changing lenders midway through a loan term. The only way to switch private lenders is by refinancing your loan. 

Refinancing to switch lenders is a good idea if the new lender is offering a lower interest rate. Even a small drop in the interest rate can save you thousands of dollars in accrued interest over the loan term. Generally, you can expect to get a lower interest rate if you have a good credit score.  

What Happens When You Switch Private Lenders Before Closing?

When you refinance private loans to switch lenders, the refinanced loan is considered a new loan. The refinanced loan will have a new interest rate, new loan term, and new terms and conditions. The interest rate and other terms will depend on several different factors and will vary from one lender to another. 

Refinancing private student loans is a good option only if you have good credit and qualify for a lower rate of interest. 

Is Switching Lenders The Right Choice For You? 

Switching lenders is not the best choice for everyone. Before choosing this option, ask yourself this one question – Why do I want to switch lenders before closing? 

The only two reasons to change are if you’re unhappy with your current lender or if you’re getting a lower interest rate with another lender. It’s not worth the trouble if you’re satisfied with your current lender or if you don’t qualify for a lower interest rate. 

If you do decide to switch lenders, take time to read customer reviews on sites such as the Better Business Bureau (BBB) or Customer Affairs. This will help you identify a reputable lender who will work with you to manage your loans. 

You don’t have to spend hours researching lenders and rates for refinancing student loans. RaptorFi’s Student Loan Refinance Rate Watch tool will search and compare loan rates for you and notify you when your specific loan conditions are met.