When you do it right, refinancing helps you better manage your student debt and the rest of your finances. It means a better interest rate, a shorter loan term, or extra cash each month for essentials. Refinancing can also mean paying less over the life of your loan.
But not every refinancing deal works out that way. Student loan refinancing mistakes are all too common, yet easily avoidable.
Before you rush into refinancing, consider these top 11 student loan refinancing mistakes:
- Not Shopping for the Best Rate Available
- Giving Up Federal Student Loan Protections—if you need them
- Not Running the Numbers
- Refinancing All of Your Loans at Once when it’s Not Necessary
- Confusing Fixed and Variable Interest Rates
- Moving Forward without a Cosigner
- Choosing a Loan without Cosigner Release
- Settling for a Loan Term Length that Doesn’t Meet Your Needs
- Accidentally Adding Time to Your Loan
- Not Checking for Unemployment Protection
- Paying Origination Fees
- Not Shopping for the Best Rate Available
1. Not Shopping for the Best Rate Available
Don’t commit to the first refinance deal you stumble across. Compare rates with multiple lenders to see the best rates you can get with your income and credit score. The first-rate you find might look better than your loans’ current weighted average interest rate but that doesn’t mean it’s the best you can do.
Start your search for a refinancing lender with our vetted refinance partners, your local credit union, or a local community bank. LendKey even lets you compare rates from several banks and credit unions at once, saving you time and energy.
2. Giving Up Federal Student Loan Protections—if you need them
Refinancing your federal student loans means giving up federal student loan protections that help you manage your debt if your income drops, you go back to college, or you enter certain career fields.
Before you refinance, you need to consider the benefits you’re missing out on:
- Income-driven repayment plans
- Loan forgiveness after a set number of on-time payments
- Loan forgiveness for public service workers
- Interest forgiveness on subsidized loans for qualifying borrowers
- Deferment due to economic hardship
- Forbearance for up to a year at a time
- Loans are canceled if you become totally and permanently disabled or die
Given the above benefits, it might not make sense for you to refinance your federal student loans if:
- You qualify for federal loan forgiveness programs
- Your income is unstable, and you’ll likely need an income-drive payment plan in the future
- You’re near the end of your loan term and most of your monthly payment is going toward principal
- You can’t get better terms on your refinanced loan than your current loan(s)
If you realize that you need the protections offered by the federal government, you can still refinance—just don’t refinance your federal loans. Refinance only your private loans, giving preference to a company that offers unemployment protection, death and disability discharge, deferment, and other protections you might end up needing.
3. Not Running the Numbers
Refinancing makes the most sense when it benefits you financially. To see if refinancing can save you money, follow these steps:
Step 1: Use our weighted average interest rate calculator to calculate the weighted average interest rate for all the students loans you want to refinance.
Step 2: Use our student loan refinance calculator to compare your current loans to the new loan terms offered by a refinance lender.
Step 3: Compare the new loan against the original loan to see how the new loan can help you meet your refinance goals.
If the new loan doesn’t save you money or reduce your monthly payment as you’d like it too, then that refinanced loan isn’t right for you.
4. Refinancing All of Your Loans at Once when it’s Not Necessary
When you’re refinancing your loans, the last thing you want is to increase the interest rate. Compare the refinanced interest rate to the individual interest rates of your loans before moving forward.
Say your loans have a 3.5%, 6%, and 8.5% interest rate. Your best refinancing offer has a 5% interest rate. If you want to save money, it doesn’t make sense to refinance the 3.5% loan to a 5% loan. Instead, only refinance the 6% and 8.5% loans. Leave the 3.5% loan with its current lender.
5. Confusing Fixed and Variable Interest Rates
Lenders usually offer two different rates for refinanced student loans. One is variable, meaning it changes during the loan term. The other is fixed, meaning it stays the same for the entire loan term. In general, variable interest rates start out lower than fixed.
Make sure you understand the differences between the two kinds of rates before choosing a deal.
A fixed interest rate is a safer option. You know exactly how much you’ll need to pay each month. Fixed rates work great for short or long loan terms. Just make sure you can afford the monthly payment.
A variable loan is riskier. Your monthly payments may fluctuate as the interest rate changes. It’s hard to predict how much you’ll end up paying in total interest. However, if you plan to pay off your loan quickly, a variable rate can save you money.
Either way, don’t make the mistake of choosing one over the other without understanding the consequences.
6. Moving Forward without a Cosigner
A cosigner can help you secure a better interest rate and loan terms—especially if you have poor credit.
If you don’t have stellar credit, but your parent or close relative does, consider adding him or her as a cosigner. You’ll gain access to lower interest rates, and maybe even qualify to work with lenders that you otherwise wouldn’t.
If you can add a cosigner, do it. Just make sure you’re both in agreement about the refinanced loan choice. Remember, if you fail to make payments, your cosigner is on the hook. That’s why it needs to be a mutual decision.
7. Choosing a Loan without Cosigner Release
As a follow up to number three, choose a loan company that offers cosigner release after a set number of on-time payments. It’s easier to ask someone to cosign a loan if you can tell them with confidence that they’ll be released after a certain number of months.
8. Settling for a Loan Term Length that Doesn’t Meet Your Needs
Term length helps determine your monthly payment amount. It also signifies an end to your student debt experience. Don’t settle for a term length that doesn’t fit your financial goals or monthly budget.
If you truly want to customize your refinanced loan, consider refinancing with Earnest. This company chooses a precise loan term based on your monthly budget. You choose the monthly payment from a list of options, and Earnest determines the loan term that fits.
Earnest looks for borrowers with a history of financial responsibility. This could mean a good credit score, a job with a high earning potential, healthy savings patterns, or a combination of the three. If that’s not you, don’t worry. Lots of lenders offer term lengths ranging from 5 to 20 years.
9. Accidentally Adding Time to Your Loan
Don’t accidentally extend your loan term.
Extending your loan’s term length means a lower monthly payment, but it could also mean you’ll pay more in interest.
You have $21,000 in federal student loans and are two years into your 10-year standard repayment plan. The weighted average interest rate is 5%.
The refinanced loan has a 4.6% interest rate and a 10-year term length.
That interest rate looks better and it’s the same term-length, right?
This loan costs more in the long run. You’d pay $47.20 less each month, but you would also have to make payments for 24 additional months since your original loan term only had eight years left. This ends up costing you $716 more in interest.
When you refinance, pay close attention to loan term. If you’re refinancing to pay less in interest, you need a shorter loan term, or a much lower interest rate compared to your current loan. Ideally, you want both.
10. Paying Origination Fees
Origination fees cover the cost of processing a loan. For a refinanced loan, paying origination fees is a waste of money. There’s no need to pay a bank, credit union, or online lender origination fees because so many refinancing institutions offer fee-free refinancing.
None of the lenders we partner with charge origination fees.
11. Not Checking for Unemployment Protection
No one wants to think about losing their job, but it happens. And, if it does, it’s hard to keep up with student loan payments.
Choose a lender that offers unemployment protection. Lenders that offer this perk let you pause payments for a set number of months during periods of unemployment. Interest still accumulates, so you can make interest-only payments if desired.
Final Thoughts on Student Loan Refinancing Mistakes
Don’t let the thought of making a mistake scare you away from refinancing.
You can avoid all these student loan refinancing mistakes by simply taking the refinancing process slowly. Do research. Talk to company representatives if you have questions. Compare companies. And always compare deals to your current loans.
At the end of the day, you need to make sure that refinancing will help you meet your goals. If it doesn’t, hold off until your credit score improves, your loan balance goes down, or the market changes.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.