10 student loan refinancing myths that could be costing you big time

August 28, 2023

Just as there are student loan myths floating around, there are just as many regarding student loan refinancing. Refinancing means working with a private lender, which will take your existing loans (potentially both private and federal loans) and turn them into a private loan with one monthly payment.

Federal student loans come from the federal government, while private loans come from private organizations such as banks, credit unions, peer-to-peer lenders, and state-based or state-affiliated organizations.

Is refinancing student loans a good idea? Learn more below.

Image Credit: fizkes/istockphoto.

What Is Student Loan Refinancing?

Refinancing student-loan debt means you apply for a new loan to pay off your current student loans with a private lender. Student loan borrowers often do this to achieve a more desirable interest rate on their loans, simplify their loan payments, or extend the years of their loan payoff.

Private lenders will take a look at your credit score, borrowing history, income, debt-to-income (DTI) ratio (the relationship between your debts and income), degree type, and other financial information to give you a new interest rate and term. Depending on your qualifications, you might qualify for a low interest rate and save money over time.

When you refinance federal loans with a private lender, it’s worth mentioning that you lose access to federal repayment programs, including public service loan forgiveness (PSLF), and income-driven repayment plans. You’ll also lose access to the forbearance and deferment federal programs, which allow you to pause your payments if you’re financially struggling. Private lenders may not have hardship programs in place, but some lenders do offer hardship programs.

Image Credit: nd3000/istockphoto.

Common Student Loan Refinancing Myths

Let’s take a look at 10 of the most pervasive myths about student loan refinancing.

Myth # 1. Consolidation and Refinancing Are the Same

Consolidation and refinancing are not the same thing, though the concept seems similar — a lender takes your loans and combines them into one. However, federal student loans are the only types of loans that can be consolidated through the U.S. Department of Education. A Direct Consolidation Loan means that several federal student loans are combined into a single federal student loan. You’ll end up with one monthly payment instead of several payments.

You may be able to lower your monthly payments by accessing a longer loan term (up to 30 years) and gain access to more income-driven repayment plan options and PSLF. You can also change any existing variable interest rates into a fixed interest rate, which gives you a more predictable interest rate.

Put simply, you can refinance federal student loans into private student loans, but you cannot refinance existing federal student loans into federal student loans.

Image Credit: dusanpetkovic/istockphoto.

Myth # 2. Federal Student Loans Are Better than Private Student Loans

You may have heard a well-meaning financial advisor say, “Get as many federal student loans as possible because private student loans are no good!”

However, private student loans can offer perks that may pleasantly surprise you when you start shopping around. You may even find that a private student loan may end up carrying less interest compared to federal graduate loans and Parent PLUS loans.

You also face federal maximums with federal student loans, which usually isn’t the case with private student loans — you can usually borrow the maximum cost of attendance with private student loans. For example, in your first year, you can only borrow $5,500 in Direct Subsidized and Unsubsidized Loans and only $3,500 of this amount may be in subsidized loans. Private student loans can offer fewer limits and more flexibility.

(Learn more at Personal Loan Calculator)

Image Credit: fizkes/istockphoto.

Myth # 3. Refinancing Federal Student Loans With a Private Lender Is a Bad Idea

Refinancing may be a good idea if you can find a private lender that offers a lower interest rate than you’re currently paying. In addition, if you’re interested in simplifying your current payments, you may also want to consider refinancing. Ultimately, you want to walk away with an advantage. Refinancing with a private lender in order to get a lower interest rate can help you spend less money over the life of your loan.

Image Credit: Daniel de la Hoz/istockphoto.

Myth # 4. Refinancing Takes Away Repayment Flexibility

While it’s true that private student loan lenders don’t have exactly the same types of student loan forgiveness or income-driven repayment (IDR) plans that their federal counterparts provide, it’s important to note that many private lenders offer plans to help you avoid delinquency or default. For example, if you make them aware of your struggles to repay your loans, you may be able to postpone payments, reduce them, or opt for alternative repayment options. If you run into trouble, it’s always a good idea to contact your private lender to learn about all of your repayment options.

Image Credit: Doucefleur/istockphoto.

Myth # 5. Getting a Refinance Quote Hurts Your Credit Score

Typically, your credit will only suffer a few points when you’re shopping for a new private loan refinance. Try rate shopping during a concentrated period of time (such as 14 days) to see a minimal impact on your credit score. When shopping around, you can also look into prequalification, which offers a soft credit check and won’t put a big dent in your score.

(Learn more at Home Affordability Calculator)

Image Credit: tolgart/istockphoto.

Myth # 6. When Refinancing, You Must Include All Student Loans

You may assume that you have to refinance all of your loans, which isn’t the case at all. If you have a combination of private and federal loans, you can keep your federal loans intact and refinance just your private student loans.

This is called a partial refinance, which means you can cherry-pick the loans you want to refinance. You might choose the loans that have the largest balance or opt for the loans with the higher interest rate. Feel free to handpick the goals that make the most sense for your situation.

Image Credit: tommaso79/istockphoto.

Myth # 7. You Can Only Refinance One Time

You can refinance as many times as you want. Many lenders do not charge prepayment penalties or origination fees, which results in no extra costs added to your refinance. You can refinance as many times as you want (which might even occur over several years) to achieve lower interest rates. Bear in mind, the hard-credit check will lower your rating temporarily each time.

Image Credit: Pra-chid/istockphoto.

Myth # 8. Refinancing Takes Forever

Refinancing doesn’t take long. Once you fill out a loan application and submit the documentation that’s required, your refinance request could be approved within a few days or a few weeks.

Image Credit: PeopleImages/istockphoto.

Myth # 9. Refinancing Student Loans Comes With A Lot of Fees

In many cases, you won’t have to pay an application fee (to cover the cost of processing your application) or an origination fee (to cover the cost of processing your loan) to refinance your student loans. However, some lenders do charge an application fee and origination fee. Find out about the fees you’ll have to pay prior to getting a refinance.

Image Credit: fizkes/istockphoto.

Myth # 10. You Lose All Student Loan Debt Relief Once You Refinance

One of the biggest myths about refinancing is the pervasive belief that you lose all student loan debt relief. Despite the fact that you lose certain federal protections, you may qualify for deferment or forbearance (a pause on your student loan payments) with a private lender. These options vary from lender to lender.

All payments on federal student loans were put on pause in March 2020 because of the Covid-19 shutdown. The Department of Education’s COVID-19 student loan forbearance program is ending. On September 1, 2023, interest resumes, and payments will be due beginning in October 2023.

Private lenders may also have other programs that allow borrowers to benefit during times of economic hardship. It’s best to check with your private lender for more information about repayment options during tough times.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Lantern By

SoFiSoFi receives compensation in the event you obtain a loan, financial product, or service through the Lantern marketplace. This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (nmlsconsumeraccess). This site is NOT owned and operated by SoFi Bank. Loans, financial products, and services may not be available in all states.

All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.

*Check your rate: To check the rates and terms you may qualify for, Lantern and/or its network lenders conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.

Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (consumer.ftc)

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.¹

SoFi’s Insights tool offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Personal Loan

SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Engine by MoneyLion. If you submit a loan inquiry, SoFi will deliver your information to Engine by MoneyLion, and Engine by MoneyLion will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Engine by MoneyLion, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Engine’s Licenses and Disclosures, Terms of Service, and Privacy Policy.Personal loan offers provided to customers on Lantern do not exceed 35.99% APR. An example of total amount paid on a personal loan of $10,000 for a term of 36 months at a rate of 10% would be equivalent to $11,616.12 over the 36 month life of the loan.

Student Loan RefinanceSoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Engine by MoneyLion. If you submit a loan inquiry, SoFi will deliver your information to Engine by MoneyLion, and Engine by MoneyLion will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Engine by MoneyLion, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Engine’s Licenses and Disclosures, Terms of Service, and Privacy Policy.

NOTICE: The debt ceiling legislation passed on June 2, 2023, codifies into law that federal student loan borrowers will be reentering repayment. The US Department of Education or your student loan servicer, or lender if you have FFEL loans, will notify you directly when your payments will resume For more information, please go here

If you are a federal student loan borrower considering refinancing, you should take into account the new income-driven payment plan, SAVE, which replaces REPAYE, seeks to make monthly payments more affordable, and offers forgiveness of balances that were originally $12,000 or lower after 120 payments, among other improvements. Also, please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as SAVE, or extended repayment plans.

Auto Loan RefinanceAutomobile refinancing loan information presented on this Lantern website is from Caribou, AUTOPAY, Engine by MoneyLion, and each of Engine’s partners (along with their affiliated companies). Caribou, AUTOPAY, and Engine by MoneyLion pay SoFi compensation for marketing their products and services on the Lantern site.

Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including but not limited to: credit standards, loan size, vehicle condition, and odometer reading. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness, consult with the lender for more details. Additional terms and conditions may apply and all terms may vary by your state of residence.

Secured Lending DisclosureTerms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.

BankingSoFi Lending Corp. (“SoFi”) operates this website in cooperation with Engine by MoneyLion presenting promotions for products and services offered by other banks, lenders, and financial institutions. If you select a promotion above, you will be connected to the website of the company offering the product. The promotions presented on this site are from companies that pay SoFi and Engine by MoneyLion compensation for marketing their products and services. This may affect whether a provider is featured on this site and could affect the order of presentation. Lantern and Engine by MoneyLion do not include all providers in the market or all of their available offerings. Click to learn more about Engine’s Licenses and Disclosures, Terms of Service, and Privacy Policy.

Image Credit: BrianAJackson/istockphoto.