Debunking 5 Student Loan Refinancing Myths

Learn the facts about student loans, including refinancing and consolidating, to make smart decisions.

By Navy Federal April 15, 2019
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If you’re dealing with student loan debt, you may have wondered if there are ways to save on monthly payments or reduce your interest rate. The good news is that refinancing or consolidating your loans can help you accomplish your financial goals and pay off your debt faster—but there are some misconceptions about how exactly the refinancing or consolidation process works. We’re here to set the record straight on 5 common myths about student loans:

Myth #1: Federal loans are always better than private loans.

Federal student loans have benefits that may not be available with private loans, such as income-driven repayment, public service loan forgiveness, student loan deferment and forbearance programs, which allow you to temporarily stop making payments or reduce the amount you pay if you meet certain requirements. However, not everyone can take advantage of those perks, and in some cases, you may benefit more by refinancing to a private loan with a lower rate. If you have federal student loans, you should check your eligibility for these programs and weigh the pros and cons. Find out if you qualify by visiting studentaid.ed.gov.

Myth #2: Student loan consolidation and student loan refinancing are basically the same.

They’re not the same, and here’s why. Consolidating student loans allows you to bring multiple loans together into one loan. When federal student loans are consolidated with the Department of Education, the interest rate on the consolidated loan is a weighted average of the interest rates on your existing loans. This isn’t the same as refinancing federal student loans with the government, which changes your overall interest rate. With private student loan refinancing, the lender pays off existing loans and replaces them with a new private loan. Private student loan consolidation generally allows you to consolidate multiple loans into a single loan and potentially reduce your interest rates depending on your credit history, income and credit score.

Myth #3: Refinancing federal loans with a private lender is never a good idea.

Once again, this depends on whether you need the protections federal loans have to offer. If there’s a chance you may benefit from federal student loan forgiveness or other programs, you should keep your federal student loans. If not, then refinancing to a lower interest rate with a private lender may be an attractive option.

Myth #4: Refinancing gives up your repayment flexibility.

With federal student loans, you have a range of repayment plans to choose from and you can easily switch to a different plan if you have trouble making payments. When you refinance to a private student loan, you don’t have the same repayment options available. However, you do have the flexibility to select a fixed or variable annual percentage rate and the length of your term (with a longer term, you’ll have lower monthly payments). Some lenders offer borrower protections like deferment and forbearance, so it’s worth asking if it’s possible to adjust your payments under special circumstances such as a job loss.

Myth #5: Getting a refinancing quote hurts your credit score.

Lenders may do a soft credit check when you ask for a refinancing quote. This helps determine the interest rates and terms for which you might qualify. A soft credit check doesn’t impact your credit score, so there’s no harm in shopping around for student loan refinancing options.

Ready to connect with a lender? See if refinancing your student loans with Navy Federal makes sense for you.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.