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.
Consider this:
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?
Not exactly.
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.
Make sure to use our refinance calculator to see if a new loan is worth it.
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.
