Author: Kelly Shiloh
Refinancing your student loans can make repayment easier and result in lower interest rates, which means more money in your pocket.
While refinancing can be helpful for student loan borrowers, you should avoid these mistakes to save money, time, and hassle.
Let’s look at some of the most common student loan refinancing mistakes.
1. Failing to compare loan rates and terms
Make sure to compare loan terms and rates before refinancing your student loans. Interest rates, after all, control your monthly payments and interest fees.
The interest rate depends on the lender, just like other financial products. Therefore, it’s crucial to carefully examine refinancing options before settling for one.
Different student loan rates and terms apply depending on your credit score and general financial situation. Because of this, a fantastic lender for someone else might not be appropriate for you.
Consider seeking rate quotes from several lenders online to compare your options. You’ll be asked for details, such as your salary, degree of education, and total student debt.
A mild credit check would be the following stage to give the lender an idea of your financial background. But relax, as this soft check will not impact your credit score.
You must also be aware of possible penalties, such as late payment fees. Furthermore, check the customer service’s accessibility and the options provided should you require a lower or more flexible payment in the future.
2. Not seeking a cosigner
Know that you don’t have to go through this process alone if you’re concerned that you won’t be eligible for the best interest rates and terms. To obtain lower rates on your loans, you should consider having a cosigner.
A free credit pre-qualification tool can be used by your potential cosigner as well. Using this tool will help assess whether having a cosigner on your student loan application might result in better rates and terms.
3. Not estimating your new monthly payment
You might think you’ll save a lot of money when you refinance your student loans to a lower interest rate. However, it’s best to determine precisely how much you may save by refinancing before proceeding.
You can estimate your monthly payments using a student loan refinance calculator.
To use the calculator, enter:
- The amount you owe.
- The length of time you intend to be in repayment
- Your projected interest rate
Use a refinance calculator to compare your monthly payments and overall interest based on the payment schedule. Take this step to see whether your new monthly payment is within your budget and will result in long-term cost savings.
4. Giving up federal loan protections
You forfeit several government protections if you refinance your federal loans with a private lender. You risk losing out on federal perks, including student loan forgiveness plans and income-driven repayments (IDR), which reduce monthly payments to a portion of your disposable income.
Giving up the chance to enroll in an IDR program, where your monthly payments may be zero if you’re unemployed, could be a mistake if you’re having trouble paying back your college loans. The same is true for any other unique federal student loan protections.
Unless you are sure you have the resources to repay your federal student loans according to the standard repayment schedule and you believe you can find lower interest rates to save money, you should avoid refinancing your federal student loans. Instead, focus on renegotiating only your private student loans.
5. Not taking advantage of discounts
Borrowers frequently make the mistake of failing to take advantage of additional discounts when refinancing. Some refinancing companies, for example, offer a 0.25% interest rate reduction when you register for auto-pay.
Borrowers who use auto-pay set up automatic withdrawals from their bank accounts to pay for their student loan repayments. A 0.25% discount may not appear to be much, but any interest deduction can help you put more money toward your debt outstanding balance and save you money in the end.
Do your homework to avoid these mistakes
Although refinancing your student loan can be advantageous, you can get even better value by avoiding mistakes. So compare rates and terms, find a cosigner, and calculate your new monthly payment. You could also save money by taking advantage of special offers. Before refinancing your student loans, make sure you do your research.