You may get pulled in several directions when you start considering student loan refinancing options. Many people who give advice are well-intentioned, but others can be misinformed. Following advice blindly may cost you a pretty penny over the life of your loans.
Refinancing can benefit you by reducing your monthly payment, lowering your interest rate, and allowing you to pay less interest over the term of your loans. But, refinancing your student loans is only helpful if you understand the truth behind common myths.
Don’t Shop Around Too Much for Student Loans
Some experts say when refinancing any loan, it’s best to shop around before settling on one lender. The same often holds true for student loans. But, others insist that shopping around too much will hurt your credit. What’s the truth?
If you’re careful about where you shop for your new loan, then checking out your options will have little effect on your credit. Most trustworthy companies only complete a soft pull of your credit report. This means that a creditor will only check your credit to deem your creditworthiness. A hard pull happens only when you agree to apply for credit. This can have a negative effect on your credit score.
Bottom line: If you don’t shop around for student loan refinancing offers, you’re doing yourself – and your wallet – a disservice. Comparing options is an essential part of the process that can save you thousands of dollars down the road.
Note: When it comes to refinancing student loans I always recommend looking at either LendEDU or Credible. They are two of the best companies and have some of the lowest rates available.
Consolidating Student Loans Always Saves Money Over Refinancing
Although consolidating and refinancing aren’t technically the same thing, the terms often get used the same. Refinancing means taking out a new loan – usually with a better interest rate and lower payments – to pay off others. Consolidation, however, is more like grouping your current loans into one big loan to simplify the payoff process.
In your research about refinancing options, it’s likely that you come across a lot of information about how student loan consolidation can save you big bucks over the life of your loans. In some cases, it’s true. But, consolidation isn’t the best option for everyone.
Although consolidation makes your payoff simpler by having one payment instead of several, you may end up paying more interest over time. This means it may take you longer to pay off your loan. On the other hand, you can refinance each, or any, of your loans separately to ensure that you’re getting lower interest rates to help you pay off your debt faster.
Also Read: Student Loans for Graduate Students
You Need to Refinance All Your Loans at Once
The last point brings us to another common misunderstanding about refinancing: If you want to refinance one student loan, you must refinance them all. In fact, refinancing is such a good option because you only need to include the loans you want to include. When one loan has a ridiculously high interest rate but another has a fixed rate you love, you can keep the wallet-friendly loan as-is and refinance the one with high interest.
If it makes sense for you, you may even consolidate some loans while refinancing others. If you’re not sure what options are best for you and can save you the most money, you can always seek the help of a student loan consultant. These experts can look at your loans and advise you on the best refinancing, consolidation, or combination options for your situation.
Refinancing Hurts Your Options
With your current loans, you may have several repayment options, like deferment or income-driven repayment plans. These options typically come with federal student loans. So, when you switch to a private lender, it’s true that some options may no longer be available to you.
Also Read: 5 Ways Parents Can Reduce Student Loan Debt
Don’t count them out, though, because many private lenders have other benefits that may outweigh the repayment options you once had. Some lenders, for example, have special protections if you lose a job and can’t find employment right away. Others offer lower interest rates when you set up an automatic payment plan.
You may even qualify for different interest options, like choosing a fixed or variable rate, and length of your loan term. Federal student loans don’t give you these important options that can save you money over the life of your loan and time paying it off. If you don’t expect to request a forbearance or deferment on your federal loans, then refinancing with a private lender shouldn’t make you feel as though you have fewer options.
Now You Know: Refinance Student Loans the Right Way
The process of refinancing student loans shouldn’t be stressful. The option is in place to help you control your finances, plan for the future while paying off debt faster. Refinancing is an excellent option for many students who are timely with their payments. They may give you more long-term control over your student debt.
