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Student loan refinancing almost seems too good to be true, but it’s not a scam.
When a lender pays off your existing student loans and replaces them with a new loan at a lower interest rate through the student loan refinancing process, it’s a legitimate repayment strategy. It can save you money over time and help you pay off your debt faster.
But it’s not right for everyone. To help you decide if refinancing is a good option, we’re addressing four common misconceptions.
Myth 1: Refinancing comes with hidden fees
You might assume that there’s a catch. It can be hard to believe that lenders aren’t sneaking fees into the fine print.
But refinancing student loans isn’t the same as refinancing a house. Unlike mortgage refinancing, student loan refinance companies don’t charge application, origination or prepayment fees that can surprise borrowers.
You still might be subject to costs like late fees, so check with your lender for details.
Myth 2: It won’t actually save me money
A big reason people avoid refinancing is because they believe the savings will be negligible. They figure it might not be worth the hassle of going through the process.
While refinancing isn’t for everyone, it can save eligible borrowers a lot of money — potentially tens of thousands of dollars throughout the life or their loan.
Let’s say you have a $25,000 private student loan with an 8% interest rate — that would give you a monthly payment of $303 over 10 years. Refinancing a 10-year loan term at 5% interest will save you $4,579 in interest overall and $38 per month.
Borrowers who will see the most savings typically have a college degree, good credit and a comfortable income that enables them to afford their expenses and debt. Use this calculator to see how much you could save on your monthly payments by refinancing.
Myth 3: It will take forever to get approved
You might be discouraged from trying to refinance because the process seems daunting. You don’t want to wade through piles of paperwork and wait for months to find out if you’re even eligible.
But the process is faster than you may think. The time between applying and getting approved typically varies anywhere from a couple of days to a couple of weeks. How long you’ll wait will depend on the lender and other factors that affect your eligibility (e.g., a higher credit score, college degree and comfortable income). You’ll get approved faster if you’re prepared with all the documents refi lenders typically look for. That could include:
- Loan or payoff verification statements.
- Your government-issued identification.
- Proof of graduation, employment and residency.
Myth 4: It will damage your credit
Scared that refinancing will bring your credit score down for good? It’s true that applying for refinancing can trigger a hard credit pull, and repeated hard pulls can temporarily lower your credit score. But there are steps you can take to ensure that any potential effect on your credit score will be temporary and/or negligible.
Some lenders will let you estimate the interest rate through pre-qualification, which prompts a soft credit pull. Soft credit pulls won’t hurt your credit. Not all lenders do this, so check to see if the one you’re interested in has a soft credit check.
The key is to compare rates from multiple lenders in a short window of time, ideally a week or less, so that the credit pulls will count as a single inquiry. These checks will stay on your credit report for about a year, but should not have an impact on your credit long-term.
Keep in mind that you do need a good or excellent credit rating — in the high 600s or above — to qualify. (If you have bad credit, you may still be able to qualify if you apply with a co-signer.)