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Loan Payoff Timeline and Procedure When Refinancing

Sometimes strange things happen with student loan refinancing, but the process is relatively quick and issues often resolve themselves.

Written By: Michael P. Lux, Esq.

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One of the more confusing and stressful aspects of student loan refinancing can be the process of actually getting the old loans paid off.

For many borrowers, the payoff amount and loan balances do not match. Some fear that lenders will be given too much money. Others worry about the possibility of paying interest on the same debt to two different lenders.

While there are usually procedures in place to make sure borrowers are not overcharged, it is a good idea for borrowers to understand the process and to learn where mistakes may have been made.

Why is my loan payoff amount different than my current balance?

Loan payoff amounts being larger than loan balances have been a common source of confusion for borrowers. Whenever the numbers don’t add up, borrowers should investigate.

At first glance, the difference might appear to be a calculation error or evidence of shady business practices, but the reality is usually more innocent. Lenders have a legitimate reason to have payoff amounts larger than the loan balance.

The discrepancy can be blamed on the fact that student loans generate interest daily. When borrowers make monthly payments, the accrued interest is first paid off, with the remainder being applied to the principal balance. For this reason, the current balance could more accurately be described as the balance as of the last payment.

In the case of a loan payoff, the lender is adding in the accrued interest that the loan has already generated. Most lenders will also include additional interest that the loan will accrue before the payoff payment is completed. The daily accumulation of interest is the reason that many lenders will ask borrowers for a specific payoff date when calculating the payoff amount.

For the lenders that do not ask for a payoff date, the industry standard is normally ten days, meaning a 10-day payoff letter will add the borrower’s current balance, plus the accrued interest, plus ten additional days of projected interest.

What if the refinance company pays too much?

Loan payoffs can be an inexact science. In some cases, payment is made electronically and happens very quickly. Other times, a check is mailed, and the timeline will depend upon geography and the US Postal Service.

Due to the unpredictable nature of the final payoff, it is common for the refinance company to pay the current lender too much money.

The good news for borrowers is that the lender does not get to keep the extra funds. In some cases, the original lender will refund the refinance company. Other times, the lender will refund the extra money to the borrower.

Lenders normally do not have much of an incentive to move quickly with the refunds, so it common for the process to take a full billing cycle. Sadly, borrowers usually don’t receive interest for the delay in payment.

Consumers should closely track the money transferred and any potential overages. In most cases, things will move slowly but automatically. However, it is a good practice to follow any overpayments to ensure that no mistakes were made.

Will I have to pay interest on both loans?

Borrowers should not be required to pay interest on two different loans for the same debt.

At the point, the funds transfer from the refinance company to the old lender, the borrower should stop paying interest on the old loan. Up until that point, the refinance company should not be charging interest to the borrower. For example, while the check is in the mail, the refinance company still has the loan funds in their account, and the borrower should not be charged interest.

Things get a bit more complicated if the refinance lender is paying off several other lenders. When this happens, the refi company may charge interest on only the portion of the loan that has funded.

Ultimately, from the borrower’s perspective, there should not be any overlap where interest is accruing with both the old and the new lender.

How long does a loan payoff take?

In most cases, once the contract is signed, the refinance lender has to wait three business days before moving forward.

This is known as the “cooling period.” During this time, the borrower has the right to cancel the contract.

After the cooling period has passed, the refinance company will submit payment to the current lenders for the loans being refinanced.

Payment via check can take about a week, while electronic payment may go through in only a day or two.

Most of the larger refinance companies, such as SoFi, Earnest, Splash, and CommonBond, have procedures in place for dealing with the majority of student loan lenders. Because the refinance companies deal with large volumes of student loans, they have a huge incentive to make the process go as quickly and smoothly as possible.

The process can take less than a week in some cases, but the majority of borrowers will have the process take two to three weeks from the time the initial application was submitting until the loan is closed. However, borrowers should know that once the entire refinance process has been completed, more time may pass before the changes are reflected on a credit report. Most lenders only update the credit bureaus monthly, so it could take a full billing cycle before things get finalized on a credit report.

When can I refinance again?

There is no rule against refinancing multiple times.

Technically speaking, once the loan has been funded, a borrower could start the refinance process again. Outdated information on a credit report could be a hurdle, but once the new loan is on the credit report and the old ones show as paid, there should be nothing to hold the borrower back.

Practically speaking, there isn’t much of a benefit to refinancing again unless the borrower can get better terms on the new loan. Some choose to refinance to a loan with a longer repayment length to get lower monthly payments, but the big concern for most borrowers is the interest rates. If a borrower can’t get better interest rates, there is little reason to refinance.

The table below is updated monthly to show the lenders currently offering the lowest interest rates on the market:

RankLenderLowest RateSherpa Review
T-1ELFI5.28%ELFI Review
T-1Splash Financial5.28%*Splash Financial Review
3Laurel Road5.49%Laurel Road Review
About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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