Seen all those prime time TV commercials about lowering your student loan debt? They promise to help you with your student loans with an easy solution: Simply refinance to a lower rate, and find your way to debt freedom faster than ever.
As nice as that sounds, it could be too good to be true. Refinancing isn't as simple as waving a magic wand and dropping your interest rate.
It's a more complicated process with no guarantee that you'll save money or repay your loans faster -- and you could be giving up a lot when you do refinance.
If you're thinking about refinancing your student loans, hit the pause button until you read this and understand the 5 biggest reasons you shouldn't.
1. Refinancing costs money
When you refinance, you generate a new loan. That means paying for it through things like origination fees and other expenses.
Before you refinance, ask a lender for the estimate of all the fees you need to pay to go through the process. Then compare that -- along with the terms and monthly payment of the new loan -- to what you think you could save through a lower interest rate to make sure you're not paying more or just breaking even.
2. You'll lose access to benefits
While you can refinance your federal student loans, you have to switch them to private loans when you do so. That means you lose access to all the benefits and protections you receive by being a federal student loan debt borrower, including:
- Ability to enroll in federal repayment plans
- Eligibility for programs like Public Service Loan Forgiveness
- Forbearance and deferment
- Discharge upon your death or permanent disability
3. Your cosigner could be left in a bad spot
If you refinance and you had a cosigner on your original loans, you must ask the new lender if they offer a cosigner release form. Without that form, your debt gets dumped on your cosigner if something happens to you -- and they have to pay the full balance immediately.
Ask about cosigner release forms before you refinance. If a lender does not offer the option to release your cosigner from the obligation of paying off your debt if you were to die, consider working with a different company.
4. You probably aren't going to get the advertised interest rate
The interest rate that companies who refinance student loans advertise is probably not the interest rate they'll offer you. The average credit score in America is just 695. That falls in the middle of the average to fair range. You'll likely need a score in the very good to excellent range, or a score in the high 700s to 800s, to get the best advertised rate.
Get your own quote from a lender to determine what interest rate you can actually qualify for. It may not be low enough to justify refinancing your loans.
5. Refinancing isn't the only way to save money on your loans
Most people want to refinance for the lower interest rate. That will allow them to pay off their debt for less money than they'd have to pay with a higher rate.
But you don't need to refinance to save money on interest! You can make more than the minimum payments or make multiple payments throughout the month to pay off your loans faster (without losing the original protections and benefits that came with them).
The faster you can repay your loans, the less money they'll cost you in interest.