Debunking Common Student Loan Refinancing Myths

Melissa BrockUpdated August 17, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Just as there are student loan myths floating around, there are just as many regarding student loan refinancing. Refinancing means working with a private lender, which will take your existing loans (potentially both private and federal loans) and turn them into a private loan with one monthly payment. Federal student loans come from the federal government, while private loans come from private organizations such as banks, credit unions, peer-to-peer lenders, and state-based or state-affiliated organizations.Is refinancing student loans a good idea? Learn more below.

What Is Student Loan Refinancing?

Refinancing student-loan debt means you apply for a new loan to pay off your current student loans with a private lender. Student loan borrowers often do this to achieve a more desirable interest rate on their loans, simplify their loan payments, or extend the years of their loan payoff. Private lenders will take a look at your credit score, borrowing history, income, debt-to-income (DTI) ratio (the relationship between your debts and income), degree type, and other financial information to give you a new interest rate and term. Depending on your qualifications, you might qualify for a low interest rate and save money over time.When you refinance federal loans with a private lender, it's worth mentioning that you lose access to federal repayment programs, including public service loan forgiveness (PSLF), and income-driven repayment plans. You'll also lose access to the forbearance and deferment federal programs, which allow you to pause your payments if you're financially struggling. Private lenders may not have hardship programs in place, but some lenders do offer hardship programs.

Common Student Loan Refinancing Myths

Let's take a look at 10 of the most pervasive myths about student loan refinancing.

Myth # 1. Consolidation and Refinancing Are the Same

Consolidation and refinancing are not the same thing, though the concept seems similar — a lender takes your loans and combines them into one. However, federal student loans are the only types of loans that can be consolidated through the U.S. Department of Education. A Direct Consolidation Loan means that several federal student loans are combined into a single federal student loan. You'll end up with one monthly payment instead of several payments. You may be able to lower your monthly payments by accessing a longer loan term (up to 30 years) and gain access to more income-driven repayment plan options and PSLF. You can also change any existing variable interest rates into a fixed interest rate, which gives you a more predictable interest rate.Put simply, you can refinance federal student loans into private student loans, but you cannot refinance existing federal student loans into federal student loans.

Myth # 2. Federal Student Loans Are Better than Private Student Loans

You may have heard a well-meaning financial advisor say, "Get as many federal student loans as possible because private student loans are no good!" However, private student loans can offer perks that may pleasantly surprise you when you start shopping around. You may even find that a private student loan may end up carrying less interest compared to federal graduate loans and Parent PLUS loans. You also face federal maximums with federal student loans, which usually isn't the case with private student loans — you can usually borrow the maximum cost of attendance with private student loans. For example, in your first year, you can only borrow $5,500 in Direct Subsidized and Unsubsidized Loans and only $3,500 of this amount may be in subsidized loans. Private student loans can offer fewer limits and more flexibility.

Myth # 3. Refinancing Federal Student Loans With a Private Lender Is a Bad Idea

Refinancing may be a good idea if you can find a private lender that offers a lower interest rate than you're currently paying. In addition, if you're interested in simplifying your current payments, you may also want to consider refinancing. Ultimately, you want to walk away with an advantage. Refinancing with a private lender in order to get a lower interest rate can help you spend less money over the life of your loan.

Myth # 4. Refinancing Takes Away Repayment Flexibility

While it's true that private student loan lenders don't have exactly the same types of student loan forgiveness or income-driven repayment (IDR) plans that their federal counterparts provide, it's important to note that many private lenders offer plans to help you avoid delinquency or default. For example, if you make them aware of your struggles to repay your loans, you may be able to postpone payments, reduce them, or opt for alternative repayment options. If you run into trouble, it's always a good idea to contact your private lender to learn about all of your repayment options.

Myth # 5. Getting a Refinance Quote Hurts Your Credit Score

Typically, your credit will only suffer a few points when you're shopping for a new private loan refinance. Try rate shopping during a concentrated period of time (such as 14 days) to see a minimal impact on your credit score. When shopping around, you can also look into prequalification, which offers a soft credit check and won't put a big dent in your score.

Myth # 6. When Refinancing, You Must Include All Student Loans

You may assume that you have to refinance all of your loans, which isn't the case at all. If you have a combination of private and federal loans, you can keep your federal loans intact and refinance just your private student loans. This is called a partial refinance, which means you can cherry-pick the loans you want to refinance. You might choose the loans that have the largest balance or opt for the loans with the higher interest rate. Feel free to handpick the goals that make the most sense for your situation.

Myth # 7. You Can Only Refinance One Time

You can refinance as many times as you want. Many lenders do not charge prepayment penalties or origination fees, which results in no extra costs added to your refinance. You can refinance as many times as you want (which might even occur over several years) to achieve lower interest rates. Bear in mind, the hard-credit check will lower your rating temporarily each time.

Myth # 8. Refinancing Takes Forever

Refinancing doesn't take long. Once you fill out a loan application and submit the documentation that's required, your refinance request could be approved within a few days or a few weeks.

Myth # 9. Refinancing Student Loans Comes With A Lot of Fees

In many cases, you won't have to pay an application fee (to cover the cost of processing your application) or an origination fee (to cover the cost of processing your loan) to refinance your student loans. However, some lenders do charge an application fee and origination fee. Find out about the fees you'll have to pay prior to getting a refinance.

Myth # 10. You Lose All Student Loan Debt Relief Once You Refinance

One of the biggest myths about refinancing is the pervasive belief that you lose all student loan debt relief. Despite the fact that you lose certain federal protections, you may qualify for deferment or forbearance (a pause on your student loan payments) with a private lender. These options vary from lender to lender.All payments on federal student loans were put on pause in March 2020 because of the Covid-19 shutdown. The Department of Education’s COVID-19 student loan forbearance program is ending. On September 1, 2023, interest resumes, and payments will be due beginning in October 2023.Private lenders may also have other programs that allow borrowers to benefit during times of economic hardship. It's best to check with your private lender for more information about repayment options during tough times.

Refinance Your Student Loans With Lantern

Now that we've debunked several refinancing myths, is refinancing right for you? Paying off student loans doesn't have to be complicated. Let Lantern help by comparing and finding the right student loan refinancing option for you. Learn more about Lantern's student loan refinance options.

Frequently Asked Questions

Is refinancing a student loan a smart thing to do?

Is refinancing my student loans worth it long-term?

Is there a downside to refinancing private student loans more than once?

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About the Author

Melissa Brock

Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Her work has appeared on Yahoo Finance, Entrepreneur, Investopedia, The Balance, FinanceBuzz, The Journal of College Admission, MarketBeat, College Finance, Rocket Mortgage, LeverageRx, Benzinga, Morty, Ally, and more.

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