If you’ve never refinanced a student loan before, the process can seem a little intimidating. To make matters worse, the information you find on the internet can often be misleading—or just flat-out wrong.
That might sound a little disheartening, but we’re here to clear up the confusion. Below, we’ve debunked seven common refinancing myths to help you decide if a student loan refinance is right for you.
What Is Student Loan Refinancing?
Student loan refinancing is the process of taking out a new private student loan to pay off your old loans—leaving you with just one loan and 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.
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7 Student Loan Refinancing Myths That Could Cost You Money
Refinancing can be a great move for many borrowers. But unfortunately, there are a lot of misconceptions floating around that can make it hard to know if it’s the right choice for you. And those misconceptions might end up costing you the opportunity to save hundreds or even thousands of dollars.
1. You Can’t Refinance Federal Student Loans
While you can’t refinance federal student loans through the government, you can do so through a private lender just like you would with a private student loan. However, keep in mind that if you refinance federal loans, you’ll lose access to federal protections—such as deferment and forbearance options, income-driven repayment (IDR) plans and student loan forgiveness programs.
If you’d like to combine your federal loans without losing these benefits, you might consider consolidating them into a federal direct consolidation loan instead. While this won’t lower your interest rate, it will let you extend your repayment term up to 30 years, which can greatly reduce your monthly payments—though it also means you’ll pay more interest over time.
2. You Must Refinance All Your Loans
Many borrowers have both federal and private student loans managed by different servicers and lenders. If you opt to refinance, you don’t have to include all of your loans. Instead, you can choose to refinance as few or as many as you want.
For example, you might consider refinancing only your private student loans so you can maintain the benefits on your federal loans. Or if you already have a student loan with a competitive interest rate, you could opt to refinance your other loans that have higher interest rates.
3. Student Loan Refinancing Is the Same as Consolidation
While the terms refinancing 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’ll lose access to federal protections.
- Federal consolidation is when you combine your federal student loans into a direct consolidation loan. This won’t change your rate but will allow you to extend your repayment term up to 30 years. Unlike refinancing, federal consolidation lets you maintain your federal benefits.
4. You Can Only Refinance Your Loans Once
There’s 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 dropped.
Refinancing lenders also typically don’t charge origination fees or prepayment penalties, so there usually isn’t any extra cost associated with the process. Keep in mind, though, that if you opt to refinance to a longer repayment term, you’ll wind up paying more in 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 from as many lenders as possible to find a good deal. And thankfully, many offer prequalification, which allows you to see a personalized rate estimate with only a soft credit check that won’t impact your credit score.
Note that if you decide to move forward with a student loan refinance lender and submit a full application, they will perform a hard credit check that could cause a slight drop in your credit score. However, this is usually only temporary, and your score will likely bounce back within a few months.
6. You Must Have Perfect Credit to Qualify
You’ll typically need good to excellent credit to qualify for refinancing. A good credit score is usually considered to be 670 or higher.
However, every lender has its 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 who have good credit.
If you’re struggling to get approved on your own, you could 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’d get on your own.
A co-signer can be anyone with good credit—such as a parent, another relative or a trusted friend—who is willing to share responsibility for the loan. Note that this means they’ll be on the hook if you don’t make your payments.
7. Refinancing Takes Forever
While refinancing can take some time, it definitely won’t take forever to complete the process. Many student loan refinancing lenders offer streamlined online applications and approval decisions within minutes.
If you’re approved, you can generally expect your loan to be processed within three to four weeks—faster than the typical 30 to 45 days needed for a mortgage refinance. To avoid any delays, be sure to fill out your application as accurately as possible and provide any requested documentation (such as loan statements or pay stubs) as quickly as possible.
After the refinance is complete, you’ll see that your old loans have been paid off, and you’ll begin making payments on your new loan.