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It’s fairly common advice given to students and recent graduates: If you’re paying off debt, refinancing your loans is one of the smartest things you can do. When you refinance, you get a lower interest rate. Your new loan could have smaller monthly payments over a longer period of time, or the payments will be the same but you’ll pay less interest. If you continue making your original monthly payments after refinancing, you’ll also pay off your loan faster. You can use the extra cash from those smaller payments to fund an emergency fund or start a retirement portfolio. With more than 40 million Americans paying off student loans, it’s a wonder that more people don’t end up refinancing. Decreasing a loan by even one percent can shave off hundreds or thousands of dollars. So why do students and recent graduates avoid refinancing? Read below for our theories.

Federal Loan Fears

Many hesitate to refinance if their loans are public. Federal student loans come with some protections that you lose if you refinance. Since the federal government only offers consolidation – not refinancing – you have to go through a private company (like those on LendKey’s platform) if you want to refinance.

Federal programs offer a variety of payment plans, including deferment and loan forgiveness programs. You have to do your research, as only certain professions are eligible for forgiveness. These can be a big draw for people struggling to make their payments each month. Once you refinance your loans, you can’t go back.

If you are eligible for a government forgiveness program, do the math before you refinance. It may be worthwhile to stick it out, since you’ll have your loans forgiven after 10 years in public service. You’ll have to pay taxes on the amount forgiven, so include that figure in your estimate. A tax specialist or financial adviser may be able to give you more specific answers.

Refinancing or Consolidating?

Some students get refinancing and loan consolidating confused, and end up avoiding the topic altogether. Most students are trying to think about their debt as little as possible, so it’s pretty common for borrowers like this to avoid going into detail about the loan repayment process.

When you consolidate your loans, you group them together so there’s only one payment. Sometimes you can also get a lower interest rate, but consolidation is mostly done to simplify the process.

Refinancing, on the other hand, is a new loan with different rates that you use to pay off the old loans. Federal loans can be consolidated, but not refinanced. So which is better?

The answer largely depends on your financial situation, as well as the number of loans you’re currently paying back. Borrowers who have recently improved their credit are typically good candidates for refinancing, whereas those paying a number of different loans should consider consolidation.

Here’s a more in-depth analysis of the difference.

How People Can Benefit From Refinancing

Refinancing is usually beneficial for anyone, but it can be especially helpful for recent graduates. Often, they’re struggling to pay their student loan payments and regular bills on low starting salaries. By refinancing, they can lower their payments or pay less in interest.

Unfortunately, refinancing is not available to everyone. You have to be approved by the lender, who will mostly likely want to see a good credit score (often 700 or higher), gainful employment, and a history of on-time loan payments. You have to prove that you’re worth loaning money to.

Before you apply for a refinance, check your credit report for any bad marks. See what your credit score is; if it’s too low, you can forget about refinancing.

If you get rejected or worry that you aren’t a suitable candidate, don’t panic – there are options available to you. You can ask companies to take collections, late payments and other negative signs off your credit report. You can lower your credit utilization percentage, avoid taking out new lines of credit and pay off other debt. These will increase the odds that a lender will take a chance on you.

It also helps to apply to multiple lenders at once. This allows you to explore your options while avoiding a hard inquiry on your credit report until after your applications have been considered. A hard inquiry can ding your score and stay on your credit report for years, so always be careful with how you approach them. You can also find lenders that don’t use a hard inquiry.

Getting a new loan is like shopping for a new car. You need to compare interest rates across multiple lenders instead of settling if you want to get the best deal. While the process can be daunting and complicated, especially for young students and graduates inexperienced in debt management, it’s usually worth consideration at the very least.

Before you refinance, ask your lender these questions:

  • Are there any fees for refinancing? Origination fees can often cost around 1% of the total loan amount. Make sure the fees cost less than your refinance savings. There may also be an application fee. Read the fine print, do the math and make sure you’re signing on with a lender that can truly save you money.
  • Will there be an extra fee if you repay the loan early? Sometimes lenders charge prepayment penalties if you pay your loan off early. It’s best to find a lender with no prepayment penalty. Loans can be stifling enough on their own, but the inability to pay them back faster can be a morale killer.
  • Is this a fixed rate or variable rate loan? There are two types of interest rates: fixed and variable. Fixed rates stay the same, while variable rates change depending on outside circumstances. Variable rates have a range they’ll fall in. Often, the lower end of the variable rate will be lower than the fixed rate loan. Before you choose a variable rate loan, make sure you can afford to make the payments if the interest rate goes up. You don’t want to be struggling to make your loan payments if interest rates change.