Refinancing is an excellent way to save hundreds or even thousands on student loans with minimal effort. Unfortunately, refinancing is not for everyone, and a mistake can be incredibly costly.
These five mistakes are all too common.
1. Trying to time the market
Interest rates rise and fall. Anyone who thinks they know exactly where interest rates will be next month, next year or five years from now is lying.
Borrowers tend to try to time the market, hoping for improved rates at a later date.
First, this is a mistake because these predictions are difficult or impossible to make. Second, borrowers can always refinance their loans again. If the interest rates today are a good deal for your situation, refinance. If the rates get even better six months from now, refinance again.
Other than a slight dip to your credit report for the credit check, there is zero cost to this transaction. Unlike refinancing a house where there are loan fees, appraisal costs, and other expenses, student loan refinancing with a reputable lender should not cost a borrower anything out of pocket. If anything, borrowers might get a little extra cash each time they refinance due to lender incentives.
2. Not shopping around for the best interest rate available
Student loan refinancing is kind of like buying a car. If you just stop by one dealership, you probably are not going to get the best deal. If you look around, you could end up saving a bundle of money.
Finding the best interest rate for student loan refinancing is a pretty straightforward process.
There are a decent number of lenders out there, and determining the best rate simply requires submitting an application.
Sherpa Tip: The lender with the best-advertised rate may not offer you the best rate. Companies use different systems for determining interest rates. One lender might offer you their best rate, while another lender offers a much higher interest rate loan. Shop around and figure out exactly where you stand with each lender.
3. Refinancing federal loans into a private loan
The decision to refinance your federal loans with a private lender is a risky choice. It can be a great decision, but it can also be a terrible one.
Federal student loans have many borrower perks and protections that are permanently lost after the debt is refinanced with a private lender. For this reason, the federal to private loan conversion is probably the biggest student loan refinancing mistakes borrowers can make.
The thing to be aware of is that there is no way to “undo” a refinance. That means once you replace your federal loans with a private one, you cannot go back to the federal perks such as loan forgiveness or income-driven repayment.
4. Going all in when it isn’t necessary
When you refinance your loans, you do not have to refinance all of your student loans.
If you have loans with interest rates of 3%, 6%, and 9%, but the best you can do on refinance is 5%, there is no reason to refinance the 3% loan. The whole point of refinancing is lowering your interest rates. If any interest rate is going up, you are probably making a mistake.
5. Making a fixed vs. variable rate error
This “mistake” is up for debate.
This writer is a big fan of fixed-rate loans if you will be holding the debt for an extended period. The logic is simple: variable rates can go up, fixed rates always stay the same. Right now, interest rates are near historic lows for student loan refinancing, so locking in a fixed-rate loan could be a really smart move.
However, variable rate loans do start out at lower interest rates than fixed-rate loans. The interest rates have not changed much over the past five years, meaning if you got a variable rate loan five years ago and are about to pay off the loan, variable was probably a smart idea.
The big question here is aversion to risk. Can you accept a slightly higher interest rate now, or do you risk it for a lower rate now and hope it doesn’t end up costing you more in the long run?
Fortunately, if you fear that you have made a refinancing mistake by selecting the wrong type of student loan, you can always refinance again.
Getting Started Refinancing
Once you have decided to refinance, the next step is to check rates with lenders.
Most rate shopping should take about 10 minutes per lender.
|Pros:||SoFi is the only lender who will help a borrower find a job, and they routinely have the lowest rates offered.||LendKey works with a large network of smaller credit unions and banks. As a result, many applicants get the best offer from LendKey.||Splash has the best new customer bonus right now, and they have excellent rates and term opitons.|
|Cons:||SoFi has grown into a large company offering mortgages, personal loans, and investment services. They no longer focus entirely on student loan refinancing.||Going the LendKey route does require working with a local bank or credit union. For many, this is a plus, but it is an extra step.||Splash is a newer lender and getting approval may be more difficult for some borrowers.|