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The 7 Biggest Misconceptions About Student Loan Refinancing

Did you know that Americans now owe more than $1.53 trillion in student loan debt, with 2016 graduates owing an average of $37,172?

If you're part of that statistic, you may have heard that refinancing your student loans can be a smart way to pay off your loans faster and save money. In fact, refinancing can save borrowers an average of more than $15,000 over the life of their loan. 


So what's stopping you from cashing in on those savings? Let's take a look at some common misconceptions.

1. Student loan refinancing is the same as consolidating

People often get confused about the difference between refinancing and consolidation.

Here’s the difference: Consolidation typically refers to a government-issued Direct Consolidation Loan that allows you to combine multiple federal student loans into one loan with a single monthly payment.

You interest rate might end up being a bit higher because your loans’ interest rates are averaged together and then rounded up the nearest one-eighth percent. 

Student loan refinancing means getting a new loan, through a private company rather than the government. Because your interest rate is based on your current credit score and other factors, you may end up getting a better rate than when you originally took out the loans.

You can use this loan to pay off one or more existing student loans. In any case, you’ll have a new loan with new payment. You can opt to reduce your monthly payment or pay off your loan faster to save money over the life of your loan.

2. Federal student loan benefits transfer over to your refinanced loan

One of the biggest reasons to consider refinancing is the chance to save money—which is obviously awesome. But you should also be aware that some of the following built-in benefits of federal student loans won’t transfer over to your new loan when you refinance:

  • Income-driven repayment plans: Federal loans are eligible for several different repayment plans that can make it easier for you to stay current. These plans limit your payment to a percentage of your income and may offer loan forgiveness after making payment for 20-25 years. However, it's important to know that you'll have to pay taxes on the forgiven loan balance.
  • Deferment: If you can’t afford to pay back your federal student loans, you can apply for deferment, which temporarily postpones or lowers your payments for up to three years.
  • Forbearance: Forbearance also pauses your loan payments for up to a year at a time, but unlike deferment, forbearance doesn’t stop interest from accruing.
  • Public Service Loan Forgiveness (PSLF): If you work in a public service job, you may be able to have a portion of your federal student loan debt forgiven through PSLF. This option won’t clear your entire student loan debt – you must make 120 payments before you’re eligible – but you could still save thousands of dollars.

If none of these options sound like they’re necessary for you, you’re probably clear to refinance without worry.

3. You must pay a fee to refinance

While there are companies that charge a fee for refinancing student loans, there are plenty of lenders that don't. 

The key is to shop around for the best loan for you. And remember, most legitimate lenders won’t charge you a fee in advance of refinancing your student loan.

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4. Refinancing is only an option for borrowers with very high salaries and credit scores

Lenders do check into your credit score, income, employment history and savings to determine your eligibility. But each lender has a different  minimum threshold for these criteria.

Some lenders even specialize in refinancing student loans for people with poor credit and low earnings. The key is to research the eligibility requirements for each lender you consider.

And if you can't qualify on your own, you can always apply with a cosigner

5. Refinancing is the only way to modify federal student loan repayments

If you have federal student loans, you have several income-driven repayment plan options that can make repayment easier without having to refinance.

Federal student loans from the Direct Loan and Federal Family Education Loan (FFEL) programs qualify for income-based repayment plans. These plans include:

  • Income-Based Repayment (IBR): This plan helps lower federal student loan payments if your debt is high compared to your discretionary income and family size. If your monthly payment does not cover the full amount of interest on your subsidized loan, the government pays the full amount of the difference for the first three years. The loan balance is forgiven after 20 to 25 years of payments (depending on when you first borrowed) and the forgiven amount is taxed as income.
  • Pay As You Earn (PAYE): PAYE is similar to the IBR, but caps payments at 10% of your discretionary income. The forgiveness timeline is shortened to 20 years.
  • Revised Pay As You Earn (REPAYE): This is a good option for those who do not qualify for the PAYE or IBR plans. There is no maximum income requirement, but payments may be higher than the standard 10-year repayment plan amount. The loan balance is forgiven after 20 years for undergraduate student loans and after 25 years for graduate or professional student loans. 

6. Refinancing takes a long time

When you make the decision to refinance a student loan, there are two steps in the process:

  1. Completing the application, and
  2. Processing the application.

Typically, it will take you about 20 minutes to complete an application to refinance your student loans.

Once you submit that application, it is reviewed by your lender and processed for approval. This step can take two to three weeks. You should continue to make payments on your existing loans until your lender notifies you that the loans have been paid.

Most people who are approved for refinancing are able to start saving in about three weeks. 

7. Increasing the loan term when refinancing will result in paying more interest

Extending your loan term through refinancing won’t necessarily result in paying more interest over time. In fact, many people can refinance at a low enough rate that total interest paid is lower over the term of the loan. It all depends on the new interest rate you receive and the amount of your monthly payments.

The good news is that if you work the right lender, your refinanced student loan should have no prepayment penalties. That means that you can pay a little extra each month toward the principal, enabling you to pay off your loan faster and save even more money.

Want to see how much you could save by refinancing? Use this Refi Ready calculator—it only takes 10 seconds to change your financial future.

Additional Nitro Recommended Student Loan Lenders

Lender Rates (APR) Loan Types Terms Eligible Degrees Eligible Loans  

Sallie Mae

3.37% - 13.72%1 Variable & Fixed
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5 - 15 years


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2.70% - 12.78%1 Variable & Fixed
5 - 15 years


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2.99% - 13.60%1 Variable & Fixed
5 - 15 years

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6.99% - 12.99%1 Variable & Fixed
10 years

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7.52% - 14.98%1 Fixed
10 year only

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Rates (APR) 3.37% - 13.72%1
Loan Types Variable & Fixed
Terms 10 - 15 years

Eligible Degrees Undergrad
Eligible Degrees Students
Rates (APR) 3.04% - 14.75%1
Loan Types Variable & Fixed
Terms 5 - 15 years


Eligible Degrees Undergrad & Graduate
Eligible Degrees Students
Rates (APR) 2.70% - 12.78%1
Loan Types Variable & Fixed
Terms 5 - 15 years


Eligible Degrees Undergrad & Graduate
Eligible Degrees Student & Parent
Rates (APR) 2.99% - 13.60%1
Loan Types Variable & Fixed
Terms 5 - 15 years

Eligible Degrees Undergrad & Graduate
Eligible Degrees Student & Parent
Rates (APR) 6.99% - 12.99%1
Loan Types Variable & Fixed
Terms 10 years

Eligible Degrees Undergraduate
Eligible Degrees No-Cosigner Student Loan
Rates (APR) 7.52% - 14.98%1
Loan Types Fixed
Terms 10 year only

Eligible Degrees Undergrad & Graduate
Eligible Degrees Student

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