Mistakes to Avoid When Refinancing Student Debt

Many students leave college with something more than a shiny new degree: they also leave with a handful of student loans.  Keeping up with multiple payments can be a huge hassle, and many people want to refinance their student loans to simplify the repayment process and save money.

If you have student debt and your rate is high – around 7% or 8% – now may be a good time to refinance.  There are no closing costs when refinancing student loans, and I’ve seen rates as low as 2.5% recently.  But before you start shopping around, make sure you don’t make any of these common mistakes.

Six student loan refi mistakes you don’t want to make

1. Not being clear on what your objective is 

People refinance to save money, but that means different things to different people.  Some people want to lower payments to help with their cash flow, and some may want to save interest over the life of the loan. 

Loans come with different term lengths - 3 years, 5 years, 7 years, 20 years, etc.  If your goal is to save interest, you won’t do that by choosing to stretch the loan out so long that you end up paying more.  If you need better cash flow, you might pay more interest over the life loan, but it still might be worth it to get lower monthly payments. 

We worked with some clients who were considering refinancing a 10-year loan.  They had one option for a 5-year loan that would have cut five years off their payments and saved them over $10,000 in interest, but their payment would have increased $150 a month.  They were buying a new house, and a lot of things were changing, so they weren't comfortable making the additional commitment.  Instead, they chose a 7-year loan that cut three years off their payments, saved them $8,000 in interest, and their monthly payment remained the same.

Just know what you want your new loan to do for you and do the math to make sure the one you're considering will fulfill it.

2. Checking with only one lender  

There are hundreds of lenders, especially online, that can refinance your loans, and all have different rates and deals.  It only takes a few minutes to do online - most only need your name, total debt, income, and education level, and from that they can run a "soft" credit check (one that doesn't appear on your credit report) to determine how much they would be willing to lend and what your rate would be.  Since these inquiries can't hurt your credit score, there's no reason not to get quotes from as many lenders as possible to avoid missing out on some interest savings.

3. Refinancing some low-interest loans  

You don't have to refinance your entire balance or even all your loans.  Most people have multiple student loans, and many times people think of them all as one big loan, but you can pick and choose which ones to include.  If you have some that are at lower rates, you don't have to refinance them if you can’t get better rates on the market. 

4. Refinancing some federal loans

With many federal loans, some incentives and programs that allow loan forgiveness or income-driven repayment plans for people who work with certain entities or industries or have a lower income.  If you qualify for these incentives and you refinance into a private loan, you lose the opportunity to take advantage of them.  Make sure you're not eligible for these programs before you refinance.

5. Stopping payments on your old loans before the new ones are fully processed

Being approved for a new loan doesn’t mean you can stop making payments on your old ones. If you stop and miss a payment before the note transfers, it can hurt your credit score.  The original lender could turn it over to collections, and you might not even know about it.  Make sure all your old load balances are zeroed out before you stop paying them. 

6.  Adding a co-signer

Co-signers are great for a lender, but not so great for the person added if something goes wrong.  If you pass away before finishing your payments, there may be opportunities for your loved ones to negotiate or walk away from the loan.  Rarely will that occur if your spouse or parents co-signed.  Not only did they lose a large part of their life and the income you provided but they have to continue paying for your education.

-Marshall Rathmell-