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If you’ve never refinanced a student loan before, the process can seem a bit daunting. To make matters worse, the information you find on the internet can often be misleading or just plain wrong.
It might sound a little daunting, but we’re here to clear up the confusion. Below, we’ve busted seven common refinancing myths to help you decide if student loan refinancing is right for you.
What is student loan refinancing?
Student loan refinancing involves taking out a new private student loan to pay off your old loans, leaving you with one loan and one payment to manage.
Depending on your credit, you might get a lower interest rate through refinancing, which could save you money on interest and potentially help you pay off your debt faster.
7 myths about student loan refinancing that could be costing you money
Refinancing can be a great decision for many borrowers. But unfortunately, there are a lot of misconceptions floating around that can make it hard to know if this is the right choice for you. And these misconceptions could end up costing you the opportunity to save hundreds or even thousands of dollars.
1. You Can’t Refinance Federal Student Loans
Although you cannot refinance federal student loans through the government, you can do so through a private lender, just as you would with a private student loan. However, keep in mind that if you refinance federal loans, you will lose access to federal protections, such as deferment and forbearance options, income-contingent repayment (IDR) plans, and programs. cancellation of student loans.
If you want to combine your federal loans without losing these benefits, you can instead consider consolidating them into a federal direct consolidation loan. While this won’t reduce your interest rate, it will allow you to extend your repayment term to 30 years, which can significantly lower your monthly payments, but it also means you’ll pay more interest over time. time.
2. You must refinance all your loans
Many borrowers have federal and private student loans handled by different managers and lenders. If you choose to refinance, you are not required to include all of your loans. Instead, you can choose to refinance as little or as much as you want.
For example, you might consider refinancing only your private student loans so that you can keep the benefits of your federal loans. Or if you already have a student loan with a competitive interest rate, you can choose to refinance your other loans that have higher interest rates.
3. Student loan refinancing is the same as consolidation
Although the terms refinance and consolidation are often used interchangeably, they mean different things when it comes to private and federal loans.
- Private refinancing (also known as private consolidation) is the process of paying off your old loans with a new private student loan. This could get you a lower rate, depending on your credit. Remember that if you refinance federal loans, you will lose access to federal protections.
- Federal consolidation is when you combine your federal student loans into one direct consolidation loan. This will not change your rate but will allow you to extend your repayment term up to 30 years. Unlike refinancing, federal consolidation allows you to keep your federal benefits.
4. You can only refinance your loans once
There is no limit to how often you can refinance your student loans. For example, you might choose to refinance again if your credit score has improved or rates have fallen.
Refinance lenders also don’t typically charge origination fees or prepayment penalties, so there’s usually no additional cost associated with the process. Keep in mind, however, that if you choose to refinance over a longer repayment term, you’ll end up paying more interest over the life of the loan.
5. Getting rate quotes hurts your credit
It’s important to shop around and compare your student loan refinance rates with as many lenders as possible to find a good deal. And luckily, many offer prequalification, which lets you see a personalized rate quote with just a soft credit check that won’t impact your credit score.
Note that if you decide to go ahead with a student loan refinance lender and submit a full application, they will perform a rigorous credit check which could result in a slight drop in your credit score. However, this is usually only temporary and your score will likely rebound within a few months.
6. You must have perfect credit to qualify
You will generally need good to excellent credit to qualify for refinancing. A good credit score is generally considered to be 670 or higher.
However, each lender has their own eligibility criteria, and some are more lenient than others, including with credit requirements. For example, Earnest accepts scores as low as 650. Just keep in mind that if you have less than stellar credit, you’ll likely end up with a higher interest rate than borrowers with good credit.
If you’re having trouble getting approved on your own, you might also consider applying with a co-signer to improve your chances. Even if you don’t need a co-signer to qualify, having one could get you a lower interest rate than you would get yourself.
A co-signer can be anyone with good credit, such as a parent, other relative, or trusted friend, who is willing to share the responsibility for the loan. Note that this means they will be liable if you fail to make your payments.
7. Refinancing takes forever
Although refinancing may take some time, it certainly won’t take forever to complete the process. Many student loan refinance lenders offer streamlined online applications and approval decisions in minutes.
If you are approved, you can usually expect your loan to be processed within three to four weeks, faster than the 30 to 45 days typically required for a mortgage refinance. To avoid any delays, be sure to complete your application as accurately as possible and provide all requested documents (such as loan statements or payslips) as soon as possible.
Once the refinance is complete, you will see that your old loans have been paid off and you will start making payments on your new loan.