5 student loan refinancing mistakes to avoid

With interest rates sliding downward, it seems refinancing a student loan is a savvy financial move. Student loan refinancing rates are as low as 3% (given excellent credit) and with the average student loan debt burden standing at $1.56 trillion in the U.S. — the average borrower owing $37,172 — refinancing makes sense right now.

“There are multiple scenarios in which refinancing a student loan makes sense, but there are caveats,” said Kalicia Bateman, a student loan specialist at Best Company. “Most lenders who offer student loan refinancing services generally require borrowers to have an excellent credit score,” she said. “Consequently, if your credit score has increased over time then you’ll be in a better place to receive approval for refinancing with the most competitive rates and terms.”

What student loan refinancing mistakes should I avoid?

With rates low, the urge to refinance into a lower rate may be hard to resist. If that’s the case, and a borrower goes forward with a student loan refinancing deal, make sure to steer clear of these trap doors on the way to loan approval.

Here are five student loan refinancing mistakes to avoid.

1. Not comparing rates and terms
2. Refinancing with a private lender if you’re a federal loan borrower
3. Not checking your credit report for errors
4. Focusing on interest rates alone
5. Not factoring in the CARES Act

1. Not comparing rates and terms

Make sure to compare rates and terms from multiple lenders. You don't need to take the first option you come across. “This may take more time and research, but taking the time to get the best rates and terms you can will be worth it in the long run,” Bateman said.

2. Refinancing with a private lender if you’re a federal loan borrower

Student loan borrowers should refinance federal loans using federal student loan refinancing options.

“If you refinance your federal loans using a private lender, you will lose all federal student loan consumer protections, and the relief measures in the CARES Act will no longer apply to your loans,” Howard said.

3. Not checking your credit report for errors

Studies show that 80% of credit reports contain errors.

“If you can pay off debts and fix errors on your credit report to increase your credit score, you'll likely secure a more favorable rate when you shop for a refinancing opportunity,” Howard said.

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4. Focusing on interest rates alone

An under-the-radar mistake a borrower can make is to look only at the interest rate of the loan and not the repayment term.

“A lower interest rate coupled with a long repayment term might result in more interest paid to the lender than a loan with a higher rate and shorter repayment term,” Howard said. “Every penny of interest that goes to the lender is a penny the borrower can't save for themselves. Depending on the goals and circumstances of the borrower, it may be important to understand what the total amount of interest paid to the lender will be over the life of the new loan.”

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5. Not factoring in the CARES Act

The CARES Act’s temporary COVID-related suspension of federal student loan payments actually makes refinancing less attractive.

“That’s the case until the currently scheduled suspension end date,” said Brian Martucci, personal finance expert at Money Crashers. “Currently, student loan payments are set to resume in January, but the suspension is wildly popular and could certainly be extended. During the suspension period, it’s wiser to use the funds saved as a result of the suspension to save up for a potential lump-sum payment once payments resume.”

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What are the advantages of refinancing student loans?

Refinancing a student loan makes sense if the borrower is trying to do any of the following:

1. Lower their monthly payments
2. Secure a lower interest rate
3. Change the loan term

“Refinancing can also work if a borrower has multiple loans that could be more easily managed through consolidation,” said Jonathan Howard, a financial advisor with SeaCure Advisors in Lexington, Ky. “For example, with federal student loans, forgiveness provisions and valuable income-based repayment options are only available if the borrower refinances their loans to a federal consolidated loan.”

Private student loans can be refinanced, too.

STUDENT REFINANCING RATES GOING DOWN - HERE'S WHY

“I had private student loan clients who came to me after they helped pay for their daughter's education year-after-year with education loans,” Howard said. “Interest rates varied between the loans and they were struggling to manage them. They took advantage of refinancing and reduced their monthly payment by nearly $500 thanks to lower interest rates.”