Sherpa Mailbag: Some Common Refinancing Questions

Michael Lux Blog, Consolidation, Student Loans 0 Comments

In this edition of the Sherpa Mailbag we take a look at some refinancing questions that Amy has.  She is on the fence about refinancing and wants to clear up some basic questions.  If you have a question for the Sherpa, feel free to ask us!

Amy writes:

I have three student loans (two federal; totaling $16,400.87 at 6.80% interest; and one private; $22,748.26 at 6.99% interest). My credit is good (~640), and I have a steady, secure, salaried job.

I have read a bunch of materials on your website, and it seems that there’s not a clear answer on whether refinancing is a good option for someone until they have applied and had a credit check. I am not interested in refinancing in order to make lower payments and am only interested if my interest rate(s) decrease.

I just want to know whether I could get an estimate for what my interest rates would be if I did refinance without officially applying. Could I refinance a single loan (the private one) while leaving the other two with the federal government?

I understand that if I refinanced a federal loan, I would lose the benefits associated with a federal loan, namely the loan forgiveness, but what else would I need to consider before knowing refinancing a federal loan isn’t going to cost me more in the long run?

There are many excellent questions here that anyone who is considering refinancing their student loans should consider.  We will take a look at them one by one.

Can I learn what my interest rate could be without a credit check?

Unfortunately, the answer to this question is no.  Lenders may tell you that they are only doing a “soft pull” and that it won’t affect your credit score, but the truth is that a full credit check is an essential part of the process.  You will not know what rates you can actually get unless the lender does the credit check.

If a lender tells you they don’t need your credit score, be sure to look at all the fine print.  Even if they can offer an estimated rate based upon limited information, the reality is that they need a full credit report before they could ever fund a loan.  Any rate they give you without doing the credit report will always be subject to change.  In short, you never really know until they check your full credit report.

From a borrower strategy standpoint, the best route is to do credit checks with a bunch of lenders.  While your credit score does take a small dip when one lender checks your report, the ding only happens with this first lender.  If you apply with six lenders, credit checks two through six, don’t actually hurt your score.  The credit agencies consider this shopping around and there is no score impact.  Once you have firm offers from a number of lenders you can find the best deal.  Fortunately, there are a large number of companies offering refinancing services, so it forces them to be competitive with each other.

Can I refinance just one loan?

Yes.  In fact, this may be a very smart strategy.  You should only refinance the loans that will be improved by the refinance process.  If you have a loan with a great interest rate, or want to keep the federal benefits on your federal loans, you can definitely keep them separate.  We have previously taken a closer look at this refinance strategy.

What benefits do I lose with refinancing a federal loan?

This is a very complicated question to answer.  To get to the bottom of it, you would have to take a look at all of the federal rules associated with the federal loan and compare it to the written contract for a new perspective loan.

That being said we can offer a more generalized answer…

Federal loans are great for people who might not pay off their loan in full, or who might not be able to afford payments on their loan.  The private lenders cannot compete with the federal forgiveness options and income driven repayment choices.

However, if you are definitely going to pay off your federal loan in full, and you are not at all worried about your future ability to make payments, refinancing is an option that makes sense.  By refinancing you can get a much lower interest rate with a private lender and save money over the life of the loan.

If you cannot improve on your federal interest rates, we suggest leaving those loans as they are.  However, if you can get a much lower rate, and you are confident in your ability to repay, going the refinancing route could save a ton of money.