Generally speaking, once a student loan consolidation or refinance has been completed, 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 ways a refinance can effectively “undo” any 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.
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 has all of the appropriate 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.
If you are part of the way through the refinance or consolidation process and thinking about cancelling, the best thing to do would be to call your new lender as soon as possible. Most lenders should want to help you pump the breaks if you don’t want to go through with the process. If you have concerns it 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. You could also call your old lenders and instruct them not to accept payment on your behalf from the new lender, but 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 even when you do reach the proverbial point of no return, there are still ways to address many loan concerns…
How Do I “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 you selected a 10-year variable-rate repayment plan and ultimately decided that a 20-year fixed-rate plan would have been a better choice. If you start the refinance process again, you 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 you can refinance a loan, and there are many companies offering refinance and consolidation services.
By going through a “redo” process, options like repayment length and lender selection can be revisited.
When is the Decision Truly Permanent?
The one time it is absolutely impossible to undo damage made by a student loan consolidation or refinance is when you refinance federal student loans with a private lender.
At the point when your federal loans are paid off in full by the private lender, you no longer have federal loans. You are stuck with the new private lender and there is no reversing this process. Federal programs like Public Service Loan Forgiveness and Income Driven Repayment Plans can never be restored to the loan.
There is no way to reverse or undo a student loan consolidation or refinance. The good news is that there are a number of steps between rate shopping and the point of no return. Additionally, many errors can be fixed after the fact by a second refinance.