Five Common Myths About Student Loan RefinancingEmail This Article
Most students take out loans — sometimes both federal and private student loans — to help pay for college. But when it’s time to start paying it can be pretty overwhelming to decide on a loan repayment strategy. Maybe you’re a recent graduate focusing on finding your first job in your field, or maybe you’ve been paying for a while but need to make some changes. No matter your situation, one piece of advice you’ll hear repeatedly is to consider student loan refinance and/or consolidation.
But there is a lot of misinformation out there that can make this decision more difficult than it needs to be. Here are five common myths, and the facts you need to make the right choice.
Myth #1: Federal student loans should never be included in a private refinance loan.
Fact: Federal loans do offer some important benefits during repayment – benefits that you may or may not be willing to give up (or may or may not be eligible to receive). These benefits include up to three years of deferment and forbearance, loan forgiveness programs, and income-based payment plans.
At the same time, federal consolidation loans may have higher interest rates than private refinance loans, making them less competitive. Make sure you consider what you want to achieve when consolidating. Forfeiting the protections of your federal loan for the lower interest rate of a private loan might line-up with your goals.
Myth #2: You won’t get any deferment or forbearance for the life of a private refinance loan.
Fact: Many private lenders offer the option to suspend payments or make interest-only payments temporarily. Lender terms, conditions, and benefits vary so check with each to see what their policies are. Direct Consolidation Loans through the U.S. Department of Education offer more generous time limits for postponing payments.
Myth #3: You can’t refinance your federal student loans if you already consolidated them with the Direct Consolidation Loan program.
Fact: You can still explore private refinance options, even if you have already refinanced or consolidated prior student loans. As long as you meet the lender’s credit requirements, you may be eligible to take out a new loan that pays off your current education loans. This applies to both federal and private student loans.
Myth #4: You’re stuck with a long repayment term you don’t want.
Fact: Private refinance loans and Direct Consolidation Loans have no prepayment penalties, so you can pay off your education loan as quickly as you want. When you make extra payments, be sure to let your servicer know that you want the money applied to your loan principal.
Myth #5: Only variable rates are available on private refinance loans.
Fact: Most lenders offer both variable and fixed interest rate options, so you can decide which option you’re most comfortable with. Variable interest rates are typically lower than fixed rates, but come with more risk. Fixed interest rates can be a bit higher, but offer more predictability for financial planning.
What to do next?