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6 Student Loan Refinancing Mistakes and How to Avoid Them
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While refinancing student loans could potentially result in a lower interest rate and more money in your pocket, there are some student loan refinancing mistakes you need to watch out for.
These could include giving up your federal student loans when you still need the special protections they carry, or taking out a refinancing loan with a less-than-ideal interest rate — maybe because you didn’t have a cosigner.
Before signing on the dotted line, make sure you’re not making any of these student loan refinancing mistakes:
- 1. Checking your rates with only one lender
- 2. Thinking you have to refinance all of your loans
- 3. Not comparing different repayment plans
- 4. Giving up federal loan protections (if you need them)
- 5. Not finding a cosigner
- 6. Prematurely stopping payments on your old student loans
- Plus: How to avoid student loan refinancing mistakes
It’s essential to thoroughly compare refinancing offers before you commit to one. Offers differ among potential customers based on factors including your credit score and overall financial picture. That’s why a great lender for someone else may not be the best for your situation.
To evaluate your options, consider requesting a rate quote from multiple lenders online. You’ll enter a few basic pieces of information, including your total student debt, income and education level. You’ll then undergo a soft credit check to give the lender a sense of your financial history.
This soft check won’t hurt your credit score. Then, you’ll be able to quickly compare fixed and variable interest rates and different repayment terms. Most lenders offer terms between five and 20 years.
Once you’ve reviewed offers, you can look more closely at the lenders offering the best rates for you. Understand what fees you might be subject to, including late payment fees. Check how easy it is to get in touch with customer service and what options are available if you need a lower payment or more flexibility in the future.
Whatever your criteria for choosing a lender, make sure to shop around. That way, you have a better chance to find the best deal for your situation. To get started, you could check out this list of our favorite student loan refinance lenders.
Be strategic about which loans you choose to refinance. Depending on your situation, it might make sense to refinance just one of your loans or to refinance multiple loans together.
Student loan interest rates should be a major factor in deciding which loans to refinance. Federal student loans have a standard interest rate that varies by year, but when you get a loan, that rate will be fixed for its entire term. Private loans can have a wide range of interest rates, depending on the borrower’s credit and financial history.
Avoid refinancing if you don’t think you can get a better interest rate than your current loans. And you should be especially careful if rates are rising across the overall market, as was the case in mid-2022.
Before choosing a repayment plan for your new refinanced loan, it’s important to run the numbers. Compare your old term and interest rate with the new ones you’ll get through refinancing. You’ll see exactly how much you’ll save on a lower interest rate or shorter repayment term. Or, if you need lower monthly payments, you’ll see how your new loan will affect your budget.
By crunching the numbers with a student loan refinancing calculator, you can see how refinancing your loans to a lower interest rate or different term will affect your payments.
In general, the shorter the loan term, the less money you’ll pay in interest over time, but it can be smart to choose a loan repayment amount that fits your monthly budget, too.
When you refinance federal loans, you turn them into private loans. As a result, you lose access to federal benefits like income-driven repayment (IDR) plans, which lower monthly payments to a percentage of your disposable income, and student loan forgiveness programs.
If you’re struggling with repayment, giving up the option to join an IDR — where, if you’re unemployed, your monthly payment might be zero dollars — could be a mistake. Likewise for any of the other special federal student loan protections.
Generally, you should avoid refinancing any of your federal student loans unless you know you have the means to complete the standard repayment plan on them and think you can find a lower interest rate to save you some money. Otherwise, stick to refinancing just your private student loans.
One way to unlock the best student loan refinancing rates is to be a competitive applicant with very strong credit. That could be the case if you scored a lucrative job out of college, are free of other debt and earn a large income. But if not, you may be able to access lower interest rates by applying with a cosigner.
Your cosigner could be a parent, a partner or another person with strong credit and solid income. They should know, though, that they take on risk when cosigning a loan. If you can’t repay the loan, the cosigner is responsible for it.
Talking through expectations alongside contingency plans if, say, you were unable to pay the bill due to a job loss, can help make sure you’re both on the same page and enable you to decide if a cosigner is the right option for you.
From start to finish, the process of refinancing your student loans usually takes a few weeks. In the meantime, you must continue making payments on your original loans. If you miss payments, your loan could become delinquent or go into default, which could seriously dent your credit score.
Before you stop paying your original student loan, make sure you receive confirmation from your new lender that the new loan has been issued, and set up your first payment. Log in to your old loan account to make sure the balance has dropped to $0, which confirms that your new lender has paid it off.
Once you get the green light from your new lender and are confident the old loan balance is $0, you’re ready to make payments toward the new loan only.
Before making changes to your student loans, do your research. Thoroughly understanding how refinancing works can help you avoid the above mistakes. It could help to consult this list of 6 questions to help decide whether refinancing is a bad idea.
As long as you’ve thought through your options, refinancing can be a smart financial move. You could simplify your monthly payments and save on interest over time.