The 6 Misconceptions About Student Loan Refinancing

June 15, 2015

Connect Member

Founder and CEO of Credible, an online marketplace for student loan refinancing.

credible.com

Deciding the best method for repaying your student loans and building a stable financial future isn’t easy. In fact, studies show that as many as 2/3 of student loan borrowers didn’t understand the difference federal and private student loans. But we launched Credible, a marketplace for student loans, because we saw an opportunity to bring more transparency and education to the process of student loan management and refinancing.

Here are some common misconceptions about student loan refinancing so you can better understand your options and decide what next step is best for you:

1. Refinancing and consolidation are the same thing.
Student loan refinancing and student loan consolidation are very different. Loan consolidation means combining multiple loans into one single loan. This is done mostly for convenience, to simplify the process and only make one monthly payment and the rate you pay does not change. Similar to consolidation, student loan refinancing is taking out a new loan to pay off the existing loans and combining them into one single loan. But unlike consolidation, student loan refinancing allows you to potentially get better interest rates and different repayment terms, potentially reducing both monthly payments and the total repayment amount of student debt.

2. All lenders offer similar rates and products.
Student loan lenders rates can vary greatly, with some interest rates on student loan refinancing products under 2% (as of May, 2015) and terms varying from 5-20 years.

3. Monthly payments will increase if I refinance at a lower rate.
Many are concerned that by refinancing they will actually increase how much they have to pay monthly — this often isn’t true. At Credible, we have seen many borrowers who refinance their student loans end up with lower monthly repayments, a lower interest rate (or APR), and a lower total repayment amount, averaging a savings of over $11,000.

4. Increasing the term of my loan will result in paying more interest.
Not necessarily. It is possible that increasing the term of your loan (the amount of time you have to pay them off), may still result in less overall interest, if you are able to decrease your rate. There are also no prepayment penalties, meaning borrowers can take advantage of lower rates on longer term loans but pay them off as quickly as they are financially able, with more frequent or larger monthly payments. Through this approach, borrowers still benefit from having the flexibility to make the lower monthly payments of a longer term loan should new financial pressures arise.

5. I have to refinance all of my loans.
You can choose which loans you want to refinance. At Credible, we often see borrowers choosing only to refinance their high interest rate loans. This can be the best option for borrowers because refinancing their highest interest rate loans and leaving their lowest interest rate loans alone can sometimes be the best way to maximize their total savings.

6. I can only refinance my student loans once.
You can refinance your loans as many times as you want. As your income or credit improves, you may become eligible for lower rates than those received when you previously refinance. Thus, it may make sense to explore refinancing at multiple points as you pay off your student loans.

Stephen Dash is a member of the DailyWorth Connect program. Read more about the program here.

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