5 Student Loan Refinancing Myths That Could Cost You

refinancing myths

Today, college grads are underemployed and wondering how they can afford to make their student loan payments.

Refinancing your student loans has the potential to reduce your interest, lower your monthly payment, or help you pay off your debt sooner. However, refinancing myths may deter eligible borrowers from taking advantage of this opportunity.

While refinancing isn’t always the right choice for everyone, it can be a smart move to save you money. Before you decide what to do, carefully consider your situation and make sure you aren’t making choices based on these common misconceptions.

1. Refinancing and consolidation are the same thing.

One of the biggest refinancing myths is that refinancing is the same as consolidation. Though the terms are sometimes used interchangeably, these are two very different concepts.

“Consolidation is simply the combining of multiple student loans into one,” said Jamie Wharton, Outreach Coordinator at Earnest. The interest rate for your consolidated loan is a weighted average of the interest rates on all the loans you combined.

On the other hand, you can refinance with a single loan or multiple loans, but this involves getting a new loan with a new interest rate, Wharton explained.

Before you decide which route to take, make sure you know the difference.

2. When you refinance, you must include all of your student loans.

One of the reasons people don’t refinance is because they don’t want to refinance all of their student loans. They mistakenly believe that it’s an all-or-nothing proposition.

However, this isn’t the case. You can refinance a single loan or multiple loans.

In my own case, I used a consolidation loan to better manage my federal loans and I refinanced my private loans separately. This worked out well for me, resulting in lower interest rates all around.

“Consider looking at the current interest rates for your student loans and refinance the ones with the highest interest rates,” said Wharton.

Figure out which loans will be best managed using federal programs and which you want to take care of privately. You can mix and match in a way that provides you the biggest benefit over time.

3. Getting a refinancing quote hurts your credit score.

Unfortunately, some refinancing myths come wrapped up in general misconceptions about credit. A common belief is that getting a refinancing quote will result in a lower credit score. But that’s not true.

“When you initially check your rate for student loan refinancing, we perform … a soft inquiry or soft credit pull,” explained Wharton. “Soft inquiries do not affect your credit score.”

Many refinancing lenders start with a soft credit check. Verify that they will perform a soft pull before you request a quote, though — just to be sure. This way, you won’t see a drop in your credit.

Student loans can hurt your credit score if you miss payments. Once you refinance your student loans, make sure you keep up with your payments. Just like any other loan, you must stay on top of things if you want to maintain a good financial reputation.

4. You can only refinance your student loans once.

Once you refinance your student debts, you’re stuck with that loan forever, right? Wrong.

“You can actually refinance a loan that has been previously refinanced or consolidated,” said Wharton. This may be a smart move if you’ve refinanced once and interest rates fall later. It’s also possible to refinance your debt to a variable rate if you think student loan interest will fall in the future.

But before you decide to re-refinance your loans (wow, that’s a mouthful), make sure you understand the risks and benefits.

5. You lose all forms of student loan debt relief when you refinance.

It’s true you lose access to the more generous and flexible federal student loan repayment options if you refinance your debt. But that doesn’t mean you lose all hardship protections.

Many private student loan servicers allow you to pause your payments or make interest-only payments for set periods of time. This means you can get relief if you’re temporarily unable to afford your student loan payments.

Be aware that private lenders often have stricter eligibility requirements. Only certain situations, such as job loss, may make you a candidate for hardship protections. So review your lender’s policy and see what it takes to qualify for help.

In order to make the most of this option, let your lender know as soon as you realize there’s a problem. You want to learn your options as quickly as possible and work with your lender to reduce the impact to your financial situation.

See if refinancing is right for you

Not everyone should refinance. However, the decision should be based on facts — not refinancing myths.

Take a look at your own situation and carefully consider your income and current payments.

What repayment programs do your federal loans qualify for?

What are your goals for paying off student loans and improving your cash flow right now?

If you don’t plan on using federal repayment and forgiveness programs and you qualify for a lower interest rate, refinancing your debt just may save you money.

If you’re still not sure if refinancing is right for you, ask yourself these 10 questions.

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