When I refinanced my student loans, I almost added two years onto my repayment plan. Luckily, I realized my mistake just in time.
This mistake could have been avoided if I’d learned more about refinancing beforehand. By understanding how the process works, you can avoid potential pitfalls.
Refinancing can be a savvy way to save money on your student loans. But before signing the dotted line on a new loan, make sure you’re not making any of these student loan refinancing mistakes.
1. Checking your rates with only one lender
When it comes to student loan refinancing, every lender might offer you a different deal. That’s why it’s important to shop around before choosing one. Fortunately, you can apply for a rate quote with multiple lenders in a matter of minutes.
All you need to do is enter a few basic pieces of information. Most lenders ask for your name, total student debt, income, and education level. Then, they run a soft credit check to get a sense of your financial history.
This soft check won’t hurt your credit score. Plus, it takes less than a minute before you see your refinancing offers. You can compare fixed and variable rates, as well as different repayment terms. Most lenders offer terms between five and 20 years.
Once you’ve reviewed offers, you simply choose the lender with the best terms. A lower interest rate means more money in your pocket. You might also consider other factors like good customer service and flexible repayment options.
Whatever your criteria for choosing a lender, make sure to shop around. That way, you can find the best deal for refinancing your student loans.
2. Thinking you have to refinance all of your loans
When it comes to refinancing, everyone’s situation is different. Some people should refinance all of their student loans into one new loan. Others should refinance one or two loans and leave the rest alone.
For example, I chose to refinance just one of my three student loans. On my refinanced loan, I lowered the interest rate from 5.96% to 4.74%. But the interest rates on my remaining two loans were already so low that refinancing wouldn’t have helped.
Another borrower might benefit from refinancing their private student loans but not their federal ones. When you refinance federal student loans, you lose access to federal programs like income-driven repayment (IDR) and Public Service Loan Forgiveness (PSLF).
Still, you might benefit from refinancing all of your student loans. Maybe you’d lower the interest rate on your loans, saving you money over time. Or, you could consolidate your monthly payments into one. That way, you would only need to worry about making one student loan payment each month.
When it comes to refinancing, be strategic about which loans you choose. Depending on your situation, it might make sense to refinance one or more of your student loans.
3. Not comparing different repayment plans
Do you have a calculator handy? Before choosing a new repayment plan, it’s important to run the numbers. Compare your old term and interest rate with the new ones you’ll get through refinancing.
That way, you can 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.
For example, let’s say you have eight years remaining on your old student loans of $30,000. Altogether, they have a weighted average interest rate of 6.80%. When you apply for refinancing, you qualify for a 4.75% interest rate.
On a seven-year repayment plan, you’ll pay about the same amount each month but save $3,657 on interest. With a five-year repayment plan, you’ll pay about $150 more per month but save $5,217 on interest. Plus, you’ll get out of debt three years ahead of schedule.
By crunching the numbers with our student loan refinancing calculator, you can see how refinancing your loans for a lower interest rate or different term will affect your payments.
4. Giving up federal student loan protections
Giving up federal loan protections is another common student loan refinancing mistake. When you refinance federal loans, you turn them into private loans. As a result, you lose access to benefits like IDR plans and loan forgiveness programs.
If you’re working toward federal loan forgiveness, you shouldn’t refinance your loans. If you suspect you might lose your income in the future, it might be wise to maintain access to IDR plans so you can lower your monthly payments.
However, some private lenders offer flexible repayment terms or forbearance in the case of financial hardship. If you’re concerned that you’ll struggle with loan payments in the future, speak with potential lenders about your options.
5. Prematurely stopping payments on your old student loans
Here’s one refinancing mistake you don’t want to make: stopping payments on your old loans too soon.
From start to finish, the process of refinancing your student loans usually takes a few weeks. In the meantime, you have to continue making payments.
If you miss a payment, your loan could become delinquent or go into default. You might not realize you missed a payment and end up paying penalties in the future. Plus, a missed payment could seriously dent your credit score.
Before you stop paying your student loan, make sure your new one is all set up and ready to go. You’ll get approval from your new lender and set up your first payment. Afterward, log into your old loan account to make sure the balance has dropped to $0.
Halting payments on your old student loan too soon would be a big mistake. So, make sure you get the green light from your new lender before you stop checking in with your old lender.
Avoid these student loan refinancing mistakes
Before making changes to your student loans, do your research. Thoroughly understanding how refinancing works can help you avoid these mistakes.
As long as you’ve thought through your options, refinancing can be a smart financial move. You could simplify your monthly payments and save thousands of dollars in interest over the life of your student loans.
For more debt payoff inspiration, here are some of the best tips for paying off your student loans faster.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!|
|2.65% - 7.14%||Undergrad & Graduate||Visit SoFi|
|2.99% - 6.99%||Undergrad & Graduate||Visit Laurel Road|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.56% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.55% - 6.49%||Undergrad & Graduate||Visit CommonBond|
|2.63% - 8.34%||Undergrad & Graduate||Visit Citizens|