Generally speaking, once a student loan consolidation or refinance is complete, there is no going back.
However, the point of no return is fairly far down the road. Today we will discuss the point at which is it impossible to “undo” or reverse a student loan consolidation and one way a borrower can effectively “undo” some mistakes.
The Point of No Return
When a student loan is refinanced or consolidated, a new lender pays off an existing loan or loans in full. Once the old loan is repaid, the old debt obligation is removed and the borrower now has a new obligation to a new lender. Borrowers go through the process to get lower interest rates and payments. Lenders offer these services because they think they can identify the lower risk and more profitable borrowers.
The refinance process normally starts with a borrower checking interest rate offerings of various student loan refinance lenders. Checking a rate does not commit a borrower to anything.
The consolidation process is initiated by federal borrowers who complete the federal application for student loan consolidation.
After a lender approves a loan for a new borrower, the borrower must submit information about the old loans to the new lender. Even this far down the road, the process can still usually be stopped.
Once the new lender, or the Department of Education in the case of a consolidation, has all the proper loan information, they will usually send out a final contract for the loan to be signed. Signing the final documents will trigger payment being sent to the old lenders. Once this payment has been sent the borrower has truly reached the point of no return.
For borrowers who are part of the way through the refinance or consolidation process and thinking about cancelling, the best thing to do would be to call the new lender as soon as possible. Most lenders will want to stop things for borrowers who don’t want to go through with the process. New borrower concerns could be an indication to the new lender that repaying the loans will be a hardship. They don’t want borrowers who will struggle to pay back the debt. Borrowers could also call their old lenders and instruct them not to accept payment on their behalf from the new lender. However, this move has limited chance of success as most lenders will be eager to cash a check to pay off a loan.
The good news is that once borrowers do reach the proverbial point of no return, there are still ways to address many loan concerns…
How to “Undo” A Student Loan Refinance?
While it is impossible to completely reverse a student loan refinance, many mistakes can be corrected after the fact.
For example, suppose a borrower selected a 10-year variable-rate repayment plan and ultimately decided that a 20-year fixed-rate plan would have been a better choice. By starting the refinance process again, borrowers can find a new lenders willing to offer a loan with the desired terms. The advantage for most consumers is that there is no limit on the number of times a loan can be refinanced, and many companies offering refinance and consolidation services.
By going through a “redo” process, options like repayment length and lender choice are effectively revisited.
The news is worse for borrowers who refinanced or consolidated their federal student loans..
When is the Decision Truly Permanent?
A private refinance of federal loans is one example of a situation that is impossible to undo. The federal loans and federal perks are gone because the loan has been paid off. The new loan, even though it was originally a federal loan, is a private loan in every way. This means federal student loan forgiveness programs and income driven repayment plans are no longer available.
The same can be said for borrowers who go through federal direct consolidation with their federal loans. Like private lenders, the Department of Education eliminates the old loans and creates a brand new direct consolidation loan. For some borrowers this is an essential step in repayment and a smart move. It can be a mistake for others. Thus, it is critical that borrowers understand the consequences of federal direct consolidation before starting the process.
There is no way to reverse or undo a student loan consolidation or refinance. The good news for some borrowers is that there are a number of steps between rate shopping and the point of no return. Additionally, a second refinance can fix some errors.