When it comes to refinancing your student loans, there are a few common mistakes you may not know about. And some of these mistakes could cost you serious money or hassle, or both.
Student Loan Refinancing
First, it’s helpful to establish a base understanding of student loan refinancing. This is the only process that allows you to combine all your student loans—federal and private—under one roof. And it can help you lock in a new, lower interest rate, as well as extend your repayment term. It is not simply consolidation, as in the Federal Direct Consolidation Loan.
Now that we’ve gotten that out of the way, here’s our list of the top 10 student loan refinancing mistakes.
1. Federal Student Loans
It may be tempting to include all your federal student loans in a refinanced loan for the sake of convenience. But there is more to consider. For starters, you would forfeit all borrower protections and benefits under the federal program once you refinance. This includes loan forgiveness programs (such as Public Service Loan Forgiveness), as well as income driven repayment plans.
2. Private Student Loans
Some borrowers make the mistake of not comparing multiple private student loan refinance lenders. Since most lenders offer a pre-qualification process with a soft credit pull, you won’t hurt your credit score by shopping around. You’ll get an interest rate quote so you can make a more informed decision.
Keep in mind that a refinanced loan is another type of private student loan which is subject to a full credit review. So there may be a ceiling on the amount of debt you can include in your refinance based on your debt-to-income ratio. And, of course, you’ll want to look at things like unique benefits each lender is offering, in addition to the interest rate.
3. Student Loan Debt
Do you know exactly how much student loan debt you have? Not knowing your numbers is a big oversight. When it comes to refinancing, you’ll need to decide if you want to include all your loans or not. Even if you choose to exclude some loans (such as federal loans that are eligible for income-driven repayment or loan forgiveness), your lender will still weigh your overall debt as part of your creditworthiness.
4. Credit Score
It’s a good idea to review your credit score before applying for a refinance loan. Having a credit score in the ‘good or better’ range (670 and above) is a solid starting point. But some lenders may require a minimum credit score of 720 or higher. Others may not disclose their requirements.
Some lenders use FICO® to evaluate your credit, and others may use VantageScore®. Regardless, your credit score is only one part of the equation. Lenders will also look at your debt-to-income ratio, current proof of income, loan status, and more. There are refinance lenders that require degree completion (bachelor’s or higher) whereas others will work with you even if you did not graduate.
Also, don’t forget that you can apply with a cosigner, such as a spouse. Adding another party to the loan may even help you qualify for a lower interest rate.
5. Credit Report
A mistake that’s easy to avoid is obtaining a copy of your full credit report to eliminate surprises. You can go to annualcreditreport.com to get a free copy of your report each year. You’ll want to review your history to ensure the information is accurate and free of any fraudulent activity.
6. Interest Rate
You should monitor interest rates to see when rates are trending higher or lower. When you refinance your student loans, you’re making a repayment commitment that will span up to 20 years. So, when you choose to refinance makes a difference in your payments, as well as the total interest you’ll repay over the life of the loan.
The good news is you can refinance more than once. Student loan refinancing is like mortgage loan refinancing. And that means you can refinance an already refinanced student loan, which is especially useful if you now need a lower interest rate.
7. Amount of Interest
Take a moment to estimate the amount of interest you can expect to repay over the life of the loan. You can use a tool like a student refinance loan calculator or you can create your own loan amortization table.
Your lender will disclose all the loan terms when you refinance. But it can be eye-opening to review the amount of interest that will be paid up front because that may influence your choice of repayment terms.
8. Repayment Term
Don’t make the mistake of selecting the wrong repayment term. Better yet, learn what your repayment options are before selecting your lender.
Many lenders will give you the option of choosing either a shorter repayment period (such as 5 or 7 years), or a longer term (like 15 or 20 years). Some lenders may automatically schedule your payments to cover the longest term possible based on your total student loan debt.
Obviously, your total debt and length of repayment, coupled with your interest rate, will determine your monthly payment amount.
9. Income Driven Repayment Plans
Income driven repayment plans are a big benefit in the federal student loan program, but they do not exist in the world of student loan refinancing. Failure to understand that you would give up these programs is a mistake you don’t want to make.
10. Loan Forgiveness Programs
You simply cannot disregard the fact that federal loan forgiveness programs (like Public Service Loan Forgiveness) would be sacrificed if you refinance. As a reminder, there is no rule that says you can’t leave out some or all your federal loans. And you may also choose to consolidate your federal loans together and refinance your private loans separately. This way, you can take advantage of federal benefits while enjoying lower monthly payments in both programs.
Monthly Payments
The table below provides an example of monthly payments before and after refinancing. This is for illustrative purposes only. Your payment amount will depend on several factors, including total debt, the interest rate you qualify for, etc.
| Before Refinancing | After Refinancing | |
|---|---|---|
| Loan Amount | $110,000 | $110,000 |
| Repayment Term | 15 years | 20 years |
| Interest Rate | 6.47% | 5.25% |
| Monthly Payment | $956 | $741 |
| Difference in Monthly Payment | $215 less | |
| Total Cost | $172,153 | $177,895 |
Prepayment Penalties
There are no prepayment penalties on refinanced student loans. You can accelerate payments at any time, including making lump sum payments whenever you receive extra money.
That said, some lenders may charge discretionary fees such as late fees if you miss a loan payment. Be sure to read the fine print!
Federal Government
Final reminder: the federal government does not oversee private student loan refinancing, and they also do not offer a similar program. While Direct Consolidation allows you to combine multiple federal loans together, you cannot shop for a lower interest rate. Your consolidation rate will be the weighted average of all your underlying loans.
