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Perhaps you’ve wondered: Does student loan refinancing cost money? Can you refinance only some of your student loans? Can it really help you lower your interest rate and save money on your debt?
All of these questions are important to answer before you restructure your student debt through refinancing. Not only do you need to know how the process works, but you also may need to debunk certain myths that could be deterring you from taking advantage of this repayment option.
For some, refinancing student loans can be an excellent move, with the potential to reduce their interest and lower their monthly payments. At the same time, there are drawbacks, too, as refinancing isn’t always the right choice for everyone.
7 myths about student loan refinancing
Before you decide what to do, be sure you aren’t making choices based on these common misconceptions:
1. Refinancing and consolidation are the same thing
2. When you refinance, you must include all of your student loans
3. You can only refinance your student loans once
4. Getting a refinancing quote hurts your credit score
5. You lose all forms of student loan debt relief when you refinance
6. Refinancing comes with a bunch of fees
7. Refinancing will take forever
One of the biggest student loan myths is that refinancing is the same thing as consolidation. Although the terms are sometimes used interchangeably, these are two very different concepts.
Consolidation is a federal process that involves combining multiple federal student loans into one loan, called a direct consolidation loan. The interest rate for your consolidated loan will be the weighted average of the interest rates on all the loans you’ve combined rounded up to the nearest one-eighth of one percentage point.
Refinancing, on the other hand, is done with a private lender, such as a bank or credit union. You can refinance a single loan or multiple ones, and you may also qualify for a better interest rate. For all the differences, check out our comparison of student loan consolidation and refinancing.
One of the reasons people don’t refinance is that they think they may be forced to refinance all of their student loans, mistakenly believing that it’s an all-or-nothing proposition.
However, this isn’t the case: You can refinance only some of your student loans. In my own case, I used a consolidation loan to better manage my federal loans, while refinancing my private loans separately.
Figure out which loans would be best managed using federal programs and which ones you’d want to take care of privately. Since you can refinance only some of your student loans, it’s a good idea to mix and match in a way that provides you with the biggest benefit over time.
That said, you can also choose to refinance all your loans to combine them into one easy monthly payment.
Despite what you may have heard, you can refinance student loans more than once — in fact, you can even refinance consolidated loans, though not vice versa.
Refinancing a loan that has already been refinanced or consolidated in the past can sometimes be a smart strategy, particularly if interest rates have fallen since you refinanced. It’s also possible to refinance your debt to a variable interest rate (which rises and falls with market conditions) if you think rates will ease in the future.
But before you decide to “re-refinance” your loans, make sure you understand the risks and benefits. Plus, remember that refinancing a consolidated federal loan will turn it into a private loan, so you’ll no longer have access to federal loan benefits.
Unfortunately, some refinancing myths come wrapped up in general misconceptions about credit. One common belief is that getting a refinancing quote will lower your credit score — but that’s not true.
Many refinancing lenders start with a “soft credit check,” which doesn’t impact your credit score at all. Just be sure to verify that they’ll perform a soft pull before you request a quote, as not all lenders are the same. Otherwise, in the case of a hard credit check, your credit score may fall slightly for a short period of time.
On the other hand, student loans can hurt your credit score significantly if you miss payments. Once you refinance your student loans, be sure you can keep up with your payments. Just as with any other loan, you’ll need to stay on top of things if you want to maintain a good financial reputation.
It’s true that you lose access to the more generous and flexible federal student loan repayment options and loan forgiveness programs when you refinance your debt with a private lender. Still, that doesn’t mean you lose all hardship protections.
Some private student loan servicers will allow you to pause your repayment or make interest-only payments for set periods of time. This means you could get relief if you’re temporarily unable to afford your student loan payments.
Be aware, however, that private lenders often have stricter eligibility requirements. Only certain situations, such as job loss, may make you a candidate for private-loan hardship protections. Review your lender’s policy and see what it takes to qualify for help.
You might think that refinancing will cost you a heap of money in origination fees and other expenses. Fortunately, though, many lenders won’t charge anything to refinance student loans.
When shopping around for a lender, look for those that don’t charge origination fees, disbursement fees, application fees or prepayment penalties. That way, you can rest assured that the refinancing process will likely save you money — not tack costs onto your already-expensive student debt.
One final student loan myth to watch out for is that refinancing is a time-consuming process that’s not worth the hassle — on the contrary, the process can be pretty fast.
Many lenders offer an instant prequalification check online, so you can see your rates in a minute or two. Once you fill out your application, a refinancing lender can get you approved in a matter of days or weeks.
Within the month, you could have your new refinanced student loan up and running. As long as you don’t run into trouble collecting the required forms (such as pay stubs and student loan statements), the refinancing process can move quickly and painlessly.
Find out if student loan refinancing is right for you
Despite all the benefits of student loan refinancing, it’s not always the best path to take. Some borrowers may not qualify, and others might already have a lower interest rate than what’s available from private lenders.
However, your decision on whether or not to refinance should be based on facts — not on refinancing falsehoods or other student loan myths. Take a look at your own situation and carefully consider your income and current payments.
If you don’t plan on using federal repayment and forgiveness programs, and you qualify for a lower interest rate, refinancing your debt might just save you money. But if you’re not sure whether refinancing is right for you, ask yourself these 10 questions.
Rebecca Safier contributed to this report.