5 Student Loan Refinancing Myths Demystified



When was the last time you took a hard look at your student loans?

If you’re like many borrowers, you probably try hard not to think about them.  That monthly deduction from your bank account might be an aggravating reminder, but one that you’ve grudgingly come to accept over time.  After all, what’s the point in dwelling on your loans if there’s nothing you can do to change them?

The truth is, there may be a way to ease your student loan burden, and that “way” is called refinancing.  It’s not available to every borrower, but if you qualify to refinance your loans at a lower interest rate, you may be able to make lower monthly payments, pay off loans faster and take a big bite out of your total balance.

Unfortunately, many eligible borrowers don’t take advantage of refinancing because of misconceptions they have about the way that student loans work.  Here, we demystify five student loan myths that can stand in the way of borrowers saving money.

Myth #1: You’re stuck with your original loans.
Ironically, many borrowers who qualify for refinancing don’t even realize this is an option.  They “set and forget” their student loans, and never look back.

But chances are your life has changed since the day you wrote your first repayment check.  Ideally, you have a higher income stream and a stronger credit score and, if you do, you may be eligible to refinance your loans at a lower interest rate.  Not sure if you qualify?  You can always ask. 

Myth #2: You have so much debt that it doesn’t matter what you do with your loans.
Actually, the higher your loan balance, the more damage a high interest rate can do to your bottom line.  Here’s an example: Let’s say that Borrower A has $50,000 in student loans and Borrower B has $100,000 in student loans.  Both borrowers plan to pay off their loans over ten years at a fixed interest rate of 6.8%.  In this scenario, Borrower A’s total interest cost will be $19,048.19, while Borrower B’s total interest cost will be $38,096.39.

It may be painful to think about your large student loan balance, but not thinking about it – and not exploring all of your options – may push the number higher, causing more pain in the long run.

Myth #3: Federal loans are always preferable to private loans.
When people make this statement, they’re often referring to the fact that some federal loans offer some benefits (such as potential loan forgiveness) that certain private loans do not.  These benefits are generally a good thing for the people that need them, but they don’t apply to every borrower or even every type of federal loan.

For example, under the Public Service Loan Forgiveness Program (PSLFP), your Direct Loan balance may be eligible for forgiveness after 120 payments if you’ve worked in the public sector that entire time.  This can be a valuable benefit if you plan to be a public employee for at least 10 years, but it certainly doesn’t apply to everyone.  And the government’s Income-Based Repayment (IBR) plan, which allows borrowers to make reduced monthly payments based on financial hardship, may sound like a great deal for anyone.  But if your income is over a certain threshold, your slightly lowered payments may come at a disproportionate price – in the form of accumulating interest.

Myth #4: You should never refinance federal loans with a private lender.
When you shift your loans from the government to a private lender, you forfeit the opportunity to take advantage of some of the above-mentioned benefits.  But, as we’ve already established, this only matters if those benefits apply to your situation.   If they don’t, the next most important factor is the interest rate on your loans.

If you have high interest unsubsidized Direct Loans or Graduate PLUS Loans, and you’re able to refinance your student loans at a lower rate, it can translate to significant cost savings.  SoFi, for example, offers refinance loans with variable rates as low as 2.93% APR and fixed rates as low as 4.99% (with AutoPay), and our borrowers can save up to $26,700* over the life of the loan.  Refinancing can have other benefits, as well, such as the convenience of consolidating multiple student loans into one monthly payment and the flexibility to choose a fixed or variable rate.

Myth #5: Only federal loans provide borrower protections like forbearance.
Even if you’re gainfully employed, it’s natural to worry about what might happen to your student loan payments if for some reason your work situation changes.  While most private lenders don’t offer the same protections that the federal government does (like forbearance, lower payments and even loan discharge in extreme circumstances), some do more than others when it comes to supporting borrowers during unexpected financial hardships.

Regardless of whether you anticipate a change in your financial situation, it’s smart to ask potential lenders what kind of protections they offer.  At SoFi, for example, we may be able to offer certain hardship programs including adjusted monthly payments and/or forbearance for a specific period of time.  And if you lose your job, we’ll even help you find a new one.
                                                                                                                                                                  

Refinancing is not for everyone, but if you qualify there can be significant benefits.  The key is to not let misconceptions get in the way of understanding your options.  And while thinking about your student loans may be the last thing you want to do, a little bit of time spent now can mean a lot of money saved in the long run.

 

* SoFi borrower savings assumes 10-year student loan refinancing with a weighted average rate of 7.67% and a loan balance of $200,000, compared to SoFi’s best 10-year rate of 5.49%.


ABOUT Anna Wolf Anna Wolf is a financial writer and content strategist based in San Francisco. After 10+ years of writing, thinking and talking about personal finance and investing, she still learns something new every day.


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