Refinancing your student loans too often can hurt your credit

  • Extending the life of your loan: Refinancing can extend your repayment period, which will leave you paying more when it’s all said and done. It may make sense for you if you need to lower your monthly payment, but keep in mind that you’ll pay significantly more in interest charges over the long run. Make sure you understand your new repayment terms and how they will affect your overall student loan debt.
  • Increasing your interest rate: It’s common to choose to refinance in order to reduce your interest rate. However, lenders don’t always offer a lower interest rate. You want to choose a loan that gives you the lowest interest rate possible. Aim for interest rates below 10%.
  • Origination fees: Origination fees cover the lender’s cost for processing the new loan, including underwriting, running credit, and verifying and processing the borrower’s documents. Some private lenders charge excessive origination fees, while others choose to offer loans without any origination fees. Do your research and compare fees so you aren’t adding to your loan balance straight out of the gate when you don’t necessarily have to.
  • Prepayment fees: Prepayment fees are illegal for student loans. All student loan lenders are required to allow penalty-free prepayment. Even though there are regulations in place, there are still lenders out there that are misleading and dishonest. If a lender claims there will be a charge for paying off your student loans early, move on to another lender.
  • Application fees: Most student loan lenders don’t charge application fees, but if you find a lender that does, know that this will be an up-front, non-refundable fee just to submit your loan application. If your loan is denied, you will have paid out-of-pocket for no reason.

Refinancing your student loan debt can save you money, but only when done smartly

Focus your search on lenders that don’t include excessive fees, but still offer you a reasonable interest rate. By understanding what each fee is you’ll be able to identify red flags and narrow down the best refinancing option possible.

Typically, it’s best to refinance your private loans separately from your federal loans. If you choose to refinance your federal student loans, you will lose certain benefits tied to your original loans. This includes flexible repayment plans, loan forgiveness options, and a variety of other repayment assistance features like deferment and forbearance.

You may not need those benefits today, but they are a valuable safety net if you were to ever lose your job or fall on hard times in the future. Be sure to compare the features of your new loan with the benefits you may be giving up from your original federal loans.

Refinancing your student loans involves a credit application, which results in a hard pull on your credit report. One inquiry is not a big deal, but a few in quick succession can drag your score down. Although the decrease is temporary and typically small, your score can take a more substantial dip if you’re applying to multiple lenders to explore your rates or choosing to refinance frequently.

Limit the number of times you refinance your student loans to no more than once per year — and even that is probably excessive.

There is no limit to the number of times you can refinance your student loans, but you shouldn’t refinance them just because you can

Refinancing should be used as a strategic tool to improve your financial position. There are many lenders to choose from, so do your research and pay attention to the details. Be on the lookout for any potential red flags like excessive fees or other predatory terms.

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