August 15, 2022 By Jeff Rose
6 Mistakes to Avoid When Refinancing Student Loans
There are plenty of situations where it makes sense to refinance your student loans, including when interest rates and terms for private loans are attractive. Refinancing may also make sense if you want to consolidate multiple loan payments into one or select a new payment plan to pay down debt faster.
If you are thinking of refinancing your student loans but want to end up ahead, you should strive to avoid the following mistakes:
Failing to Compare Loan Rates and Terms
Comparing student loan rates and terms is an important step to take before you refinance. After all, your interest rate will determine your monthly payment, monthly interest charges, and the total cost of interest over the life of your new loan.
Like other financial products, student loans often come with better rates and terms depending on the lender. However, you won’t know what kind of rate you’ll get unless you do the research. Here’s my advice: take the time to use a free credit pre-qualification tool to gauge your approval odds without a hard inquiry on your credit report. This step will show you what kind of rate you may qualify for before you apply.
Not only that but make sure you compare student loan companies based on the repayment options they offer. Ideally, you’ll find a company that lets you choose how long to repay the loan since that will impact your monthly payments and the total cost.
Not Seeking a Cosigner
If you’re worried you won’t qualify for the best rates and terms, remember that you may not have to go through this process alone.
If you have someone in your life who can cosign with you on your loans, like a spouse, you might qualify for a loan with lower rates than if you applied on your own.
Your potential cosigner can also use a free credit pre-qualification tool. Doing so will help determine if their presence on your student loan application could get you better rates and terms.
Failing to Check for Fees
While checking your (and your potential cosigner’s) rate is a smart first move, this isn’t the only component you’ll want to compare. You should also see how student loan companies stack up against each other with their loan fees (or lack thereof).
Look out for potential hidden fees like those for origination or application, which you absolutely want to avoid. Also check for prepayment penalties – these are extra charges applied when you decide to pay your student loans off early.
Fortunately, most lenders offer student loans with no origination or hidden fees, including College Ave Student Loans.
Not Estimating Your New Monthly Payment
You might assume that you’ll save significantly when you refinance your student loans to a lower rate. But before you move forward, it’s best to find out exactly how much you can save by doing so.
This is where a good student loan refinance calculator comes in. You can enter the amount you owe, the number of years you plan to be in repayment, and your estimated interest rate to see what your total interest and new monthly payment amounts could be.
By using a refinance calculator, you can also compare monthly payments and total interest based on the payment plan. For example, you’ll likely have a lower monthly payment if you decide to repay your student loans over 15 years instead of 10. However, the longer timeline will cause you to pay more in interest. Take this critical step to understand if your estimated new monthly payment will work with your budget and save you money over time.
Forgetting to Ask About Discounts
Remember to check for student loan discounts you may be eligible for when you refinance, including those for auto-pay, like College Ave’s 0.25% interest rate reduction. Once you enroll and agree to an automatic monthly withdrawal from a valid bank account, you can qualify for the discount.
Forgetting About Federal Loan Protections
Finally, it’s important to remember that using a private lender to refinance your federal student loans means you will give up certain federal protections, such as access to income-driven repayment plans.
Federal student loan borrowers can also qualify for forgiveness programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. But if you switch to private student loans, you will lose access to these programs.
The Bottom Line: Do Your Homework to Avoid These Student Loan Refinancing Mistakes
Refinancing your student loans can be advantageous, but you’ll position yourself to get the best value if you can avoid these mistakes. Shop around for your new loan based on interest rates, loan terms, and fees. Don’t forget to consider if a cosigner might help you get the best terms.
In the meantime, before you apply, play around with a student loan refinance calculator so you can get an idea of how your new monthly payment might look. And if you’re willing to set up auto-pay, make sure to factor in that discount too.
By taking these steps as you compare the best student loan refinancing companies, you can make the process less stressful and find your best possible deal.
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