Generally speaking, once a student loan consolidation or refinance is complete, there is no way to undo the process or fix a mistake.
Fortunately, there are a couple of bits of good news for borrowers with regrets:
- There are many steps required before a consolidation or refinance is final.
- Even though there isn’t an “undo” option, there are ways to correct certain errors.
Today we will discuss the point at which it is impossible to “undo” or reverse a student loan consolidation or refinance, and one way a borrower can effectively correct some issues.
Consolidation and Refinance Steps
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.
What is the difference between student loan consolidation and student loan refinancing?
Student loan consolidation is a federal student loan process that can only be done by the Department of Education. A refinance is when a private lender pays off existing private or federal loans and creates a new private loan.
Generally speaking, refinancing and consolidating follow a similar process, but are done for different reasons. When it comes to undoing mistakes in a refinance or consolidation, the two processes are very similar.
The Refinance and/or Consolidation Point of No Return
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 canceling, 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 a 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 lender 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 offer refinance 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.
Bottom Line – A Fix is the Best Case Scenario
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.
A successful second refinance can’t fix all errors, and there is no guarantee of an approval, but it does offer a chance to correct certain mistakes.
Hi Richard, I’m in a similar situation as Jen. I consolidated my FFEL loans (that were in an IBR plan for about 10 years or more) and two previous DL consolidated packages into one consolidation at the beginning of 2022. I was unaware that by grouping those together, previous payments made on my DL loans would not count toward the PSLF program. Is there a way I can fix my consolidation? It is sickening to think I would lose all that time.
Hi Adrian,
If you consolidated at the beginning of 2022, you likely won’t lose that time towards forgiveness. The limited waiver was still in effect for PSLF borrowers, and the IDR Count update hasn’t been completely processed yet, but you did it well in advance of the deadline.
Early 2022 should beat the deadline for both of these temporary programs.
Thank you. I just spoke to my loan provider and they said since I consolidated last year that I did not lose time. I still have to call the federal student aid since my time in Idr is not listed on the website. Big sigh of relief!
Hi Richard, I have been in an income repayment plan for years and years. I would say 15 years or more. In the beginning I was in forbearance because they did not tell me I had other options. I did not know if I consolidated I would lose all of that time. It makes me sick. What can I do? I make so little money my payment is zero and has been zero this whole time.
Hi Jen. I think I have some really good news for you. It looks like you may not lose any of that time and may even get credit for the forbearance.