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By refinancing your student loans, you could cut your interest rate way down and save money. But as with any financial move, this process has some pitfalls you need to avoid. To ensure you protect your money and go about refinancing the right way, here are four common student loan refinancing mistakes — and what to do instead.
- Not shopping around for the lowest rate
- Misunderstanding the consequences for federal loans
- Not cherry-picking the loans you wish to refinance
- Accidentally resetting the clock on your repayment term
Student loan refinancing mistake #1: Not shopping around for the lowest rate
The best benefit of student loan refinancing is lowering your interest rate — and saving money as a result.
But if you go with the first refinancing offer you get, you’ll never know if you could have gotten a lower rate elsewhere.
While inquiring with your bank is a good start, stopping there means you won’t know what other lenders could offer you.
What to do instead:
Take some time to shop around for refinancing offers to find the best rate. Many online lenders, such as SoFi and Earnest, let you check your rates online instantly with no impact on your credit score.
Refinancing marketplaces LendKey and Credible will even do the work of comparison shopping for you. All you need to do is enter a few basic pieces of information, and these companies will show you offers from multiple lenders at once.
LendKey shows you refinanced loans from credit unions and community banks, while Credible’s partners tend to be national banks, credit unions and online lenders.
Mistake #2: Misunderstanding the consequences for federal loans
If you’re relying on any federal programs, refinancing federal student loans with a private lender would be a mistake.
When you refinance, you essentially replace one or more of your old loans with a new one from a bank, credit union, or online lender.
This new loan is a private loan, so it’s not eligible for federal benefits. Some federal benefits include,
- Income-driven repayment plans
- Forbearance and deferment
- Federal forgiveness programs, such as Public Service Loan Forgiveness or Teacher Loan Forgiveness
If you’re relying on any of these programs — or suspect you’ll need one in the future — refinancing your federal student loans with a private lender would be a mistake.
What to do instead:
Consider whether you need any federal protections before refinancing your federal student loans.
If you do, you can still refinance any private student loans, but should leave your federal ones alone.
It’s also a good idea to find out what benefits private lenders offer, if any. SoFi, for example, lets you pause payments temporarily through its “unemployment protection” benefit.
These protections could come in handy if you lose your job in the future.
Mistake #3: Not cherry-picking the loans you wish to refinance
Another student loan refinancing mistake would be automatically refinancing all your student loans, instead of thinking over the pros and cons for each individual loan.
If one loan already has a low interest rate, for instance, it might not benefit much from refinancing.
Or if another is federal and you want to keep it that way, you should probably leave it alone.
What to do instead:
If you’re considering refinancing, know that you can — but don’t need to — refinance all your student loans.
Instead, you can cherry-pick the ones that would benefit the most (i.e., ones that carry a high interest rate).
That said, you might want to refinance all your loans to combine them into one. Instead of having to track multiple loans and payments, you’ll only have to deal with a single loan — which could make repayment a whole lot simpler.
Mistake #4: Accidentally resetting the clock on your repayment term
After qualifying for student loan refinancing, you’ll get to choose new terms on your student loans.
But you have to be careful not to accidentally reset the clock on your repayment, especially if you’re looking to pay off your debt faster.
Let’s say you’re already three years into a 10-year repayment term (i.e., you have 7 years left). If you choose another 10-year term when you refinance, you’ll accidentally add three extra years to your debt!
Of course, you might want to stretch out repayment so you can lower monthly payments. Just make sure you’re not accidentally adding time to your term without realizing it.
What to do instead:
Before choosing repayment terms, make sure to compare all your options and figure out how they line up with your budget and goals.
Maybe you want a short term to get out of debt fast. Or maybe you want a long term so you can lower your monthly payments.
Whatever you choose, remember to consider both monthly payments and long-term interest costs.
And remember that even if you choose a long term, you can always make extra payments at any time without penalty to get out of debt faster.
Final thoughts
As with any financial move, it’s important to understand the ins and outs of refinancing before you make changes to your student loans.
To get all the details you need to know — and avoid making any of these student loan refinancing mistakes — head to our Student Loan Refinancing FAQ.
If you’re ready to start checking your rates, head here to see our list of the best lenders with the lowest rates.
Want better rates? Here are the best banks to refinance student loans:
| Variable rates start at... | Fixed rates start at... | Repayment terms | Welcome bonus | Check your rates | |
|---|---|---|---|---|---|
 | 4.54% | 4.49% | 5 - 20 years | $200 | Visit LendKey |
 | 4.99% | 4.47% | 5 - 20 years | $200 | Visit Earnest |
 | 4.22% | 3.97% | 5, 7, 10, 15, and 20 years | $120 | Visit Laurel Road |
 | 4.53% | 4.40% | 5 - 20 years | $100 or $200, depending on the amount you refinance | Visit Credible |
 | 5.09% | 4.74% | 5, 7, 10, 15, and 20 years | $100 | Visit SoFi |
 | 4.53% | 4.83% | 5, 7, 10, 15, and 20 years | $100 | Visit ELFI |