What Happens to Your Original Loan When You Refinance?

What happens to your original loan when you refinance

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Let’s assume you’ve taken out student loans and need to start repaying them. There are several options available when it comes to making paying off student loans more bearable. Refinancing is a popular option. But what does refinancing entail, and how is it different from your original loan? What even happens to your original loan when you refinance?

Student Loan Refinance

When you refinance a loan, you have a private lender (someone unrelated to the federal government) pay off your original loan. You then have to pay back the private lender. This can be a good way to lower the interest rate on your loan to make it more manageable.

What this also means is that you no longer have access to certain repayment plans. With federal student loans, there are debt forgiveness options, income-based options, and ways to defer a payment. With a private lender, many of these options can disappear. Keep this in mind if you want to refinance. Sometimes, the repayment plans and benefits you’d give up will affect you negatively.

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Should You Refinance?

When considering whether or not to refinance a loan, you should look at several factors, the most prominent being your income. If you will continue to make enough that you can pay off your student loans completely, then refinancing might save you money by lowering your interest rate. If consistent income might be a struggle, or you will be working as a federal employee or some not-for-profit companies, then keeping your original loan might be a better option. This of course only applies if your original loan was from a federal source.

Other Things to Consider:

Other things to look at include: The repayment period; the monthly payment; interest rates. The repayment period is how many years you will be making payments on the loan. You should compare your original loan to your prospective refinancing plan. Does refinancing mean you’ll have more or less time to pay it off, or will it remain the same? Federal loans frequently have timelines ranging from 10 to 30 years, whereas refinanced loans are typically only given 5 to 20 years. Part of that is based around your monthly payments. Private lenders are likely going to have higher minimum payments.

A federal student loan is most likely to have a fixed interest rate. This means that the interest rate is set to the rate you were given when the loan was created. It will remain at that rate for the duration of the loan repayment. A private lender might give you the option of a fixed interest rate or a variable interest rate, which would mean that the interest rate would be in flux throughout the repayment period.

Both fixed and variable rates have their pros and cons. On one hand, having a fixed interest rate means that if interest rates go up, you’ll still have a lower rate. On the other hand, if interest rates go down, people with a variable rate get a lower interest rate compared to those with a fixed rate. Ultimately, you need to decide which one is right for you based on your income, how much you’re paying, how quickly you can comfortably pay off your loan, and your financial situation.

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