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The Downside to Refinancing Your Student Loans

Kat Tretina
Negatives-Of-Refinancing-Your-Student-Loans
Negatives-Of-Refinancing-Your-Student-Loans

Before You Read, Lower Your Student Loan Payment

It’s that quick & easy — really. Our free tool checks a network of top refinance lenders and shows you options in one easy chart.
Checking rates takes 2 minutes with no impact on your credit
Federal & private loans are eligible
No maximum loan amount

Before You Read, Lower Your Student Payment

It’s that quick & easy — really. Our free tool checks a network of top refinance lenders and shows you options in one easy chart.

Checking rates takes 2 minutes with no impact on your credit
Federal & private loans are eligible
No maximum loan amount

If you have high-interest student loans — some loans have interest rates over 11% — student loan refinancing can sound like a dream come true.

You can lower your interest rate, save money, and pay off your loans years ahead of schedule.

What could possibly be the problem?

Well, there is a downside to refinancing your student loans. Before submitting your loan application, make sure you understand both the benefits and drawbacks of refinancing your debt.

What is student loan refinancing?

Student loan refinancing is a strategy some people use to manage their debt. You apply for a loan from a private lender to cover the amount of your current debt and use it to pay off your existing loans. After that, you’ll have just one loan to manage instead of several. And, you’ll have only one monthly payment to remember to make to one loan servicer.

The new loan is entirely different than your old ones. It has a different interest rate, loan length, and minimum payment.

Why would someone refinance? There are some major benefits:

1. You can save money

If you qualify for a loan with a lower interest rate than your current debt, you can save thousands of dollars over the length of your loan.

2. You can lower your monthly payment

When you refinance, you can opt for a longer loan term. Extending the loan length can reduce your monthly payments, making them more affordable.

3. You can pay off your debt early

With a lower interest rate, more of your monthly payment will chip away at the loan principal instead of interest charges. If you keep up with the payments, you can pay off your refinanced loan months or even years ahead of schedule.

The 2 Best Companies to Refinance Student Loans

Our Top-Rated Picks for 2022 Offer Low Rates and No Fees

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No Maximum Loan Amount

Fixed Rate

5.48% – 8.94% APR 4

Variable Rate

5.28% – 8.99% APR 4
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Precision Pricing — Pick Your Monthly Payment

Fixed Rate

5.19% – 9.74% APR 2

Variable Rate

5.72% – 9.74% APR 2

The downside of refinancing student loans: 5 things to consider

While refinancing can be very beneficial for some, it’s not for everyone. There is a downside to refinancing student loans. In fact, here are five reasons why refinancing may not be a good idea.

1. You may not be able to reduce your interest rate significantly

The biggest benefit to student loan refinancing is the ability to qualify for a lower interest rate. However, that perk is only helpful if your current  student loan rates are high.

If you have loans with lower interest rates, such as the current 4.53% rate on Direct Subsidized and Unsubsidized Loans, you may not be able to qualify for a loan with a lower rate.

Even if you opt for a variable-rate loan, which tends to start off quite low, the rate can fluctuate over time. If the market changes, you could end up with a higher rate than what you had originally, even if you save more money initially.

2. You may not have access to deferment or forbearance

If you have federal student loans, you have the option of entering forbearance or deferment. Through these programs, you can postpone making payments on your loans without becoming delinquent or entering default. This benefit can be a big help if you’re facing financial hardship, such as a medical emergency or job loss.

When you refinance, your federal loans become private ones. You’ll lose the ability to defer your payments under the federal program, which tends to be more lenient than deferment and forbearance options from private lenders. If you work in a volatile industry where layoffs are common, that’s a big drawback.

3. You won’t be able to use an income-driven repayment plan

If you have federal student loans and don’t make a lot of money, you can apply for an income-driven repayment (IDR) plan. With IDR plans, the loan servicer caps your monthly payment at a percentage of your discretionary income and extends your repayment term. Depending on your family size and income, you could have a payment as low as $5.

Once you refinance, you’re no longer eligible for IDR plans. You’ll have to make the full monthly payment each month, even if your income changes or your family grows. If your income is low or if you expect it to fluctuate, it may be better to keep your loans as federal loans.

4. You won’t qualify for loan forgiveness

Some federal loan borrowers can qualify for loan forgiveness through programs like Public Service Loan Forgiveness or Teacher Loan Forgiveness. After completing a service term and making qualifying payments, the remaining balance on your student loans is completely discharged. If you had a lot of student loan debt, that means you’re no longer responsible for repaying thousands of dollars.

Unfortunately, you’re not eligible for those programs once you refinance your loans. If you’re a teacher or work for a non-profit or government agency, student loan refinancing may not be for you. It may be more cost-effective to keep your loans as federal debt so you can qualify for these forgiveness options.

5. You may not be able to get approved

To qualify for a refinancing loan and to get a low interest rate, you need to have good to excellent credit. Otherwise, you’re unlikely to get a loan at all.

If your credit is less than stellar and you don’t have a co-signer to help you, student loan refinancing is probably not an option for you.

If that’s the case, don’t give up! Instead, work on boosting your credit score and improving your income. By doing so, you’ll increase your chances of qualifying for a refinancing loan in a year or two.

Managing your student loan debt

If you are struggling with education debt and want to pay off your loans as quickly as possible, student loan refinancing can be a smart strategy. However, it’s not an approach that works for every borrower. Especially if you have federal loans, think twice about refinancing, as it affects what benefits and programs you can use.

If you’ve weighed the pros and cons and think refinancing is right for you, use Purefy’s Compare Rates tool to get offers from multiple student loan refinancing lenders at the same time  — quickly and simply  — with one easy form.

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Ascent Rate Disclosure

Ascent’s undergraduate and graduate student loans are funded by Bank of Lake Mills or DR Bank, Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentStudentLoans.com/Ts&Cs.

Rates are effective as of 12/1/2023 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized back account each month. For Ascent rates and repayment examples please visit: www.AscentStudentLoans.com/Rates.

1% Cash Back Graduation Reward subject to terms and conditions. Click here for details.

SoFi Rate Disclosure

3 SoFi Rate Disclosure:

Fixed rates range from 4.49% APR to 8.99% APR with a 0.25% autopay discount. Variable rates from 5.09% APR to 8.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

ISL Rate Disclosure

Earnest Rate Disclosure

2 Earnest Rate Disclosure:


Actual rate and available repayment terms will vary based on your income. Fixed rates range from 5.44% APR to 9.99% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.97% APR to 9.99% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.

Advertiser Disclosure:

THIS IS AN ADVERTISEMENT. YOU ARE NOT REQUIRED TO MAKE ANY PAYMENT OR TAKE ANY OTHER ACTION IN RESPONSE TO THIS OFFER.

Earnest Rate Disclosure

Rates displayed include the 0.25% Auto Pay discount. You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.67% APR to 16.15% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.64% APR to 16.45% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan origination loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

Loan Eligibility criteria: Eligible students must: 1) For college Freshmen, Sophomores and Juniors, attend, or be enrolled to attend, a Title IV school full-time. For college Seniors and Graduate students, attend, or be enrolled to attend, a Title IV school at least half-time; and 2) be pursuing a Bachelor’s or Graduate degree. Earnest private student loans are subject to credit qualification, completion of a loan application, verification of application information, self-certification of loan amount, and school certification.

Responsible borrowing tip: Explore all scholarship, grant and federal options before applying for a private loan.

Earnest Private Student Loans are made by One American Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104.

Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.

Advertiser Disclosure:

THIS IS AN ADVERTISEMENT. YOU ARE NOT REQUIRED TO MAKE ANY PAYMENT OR TAKE ANY OTHER ACTION IN RESPONSE TO THIS OFFER.

ELFI Rate Disclosure

4 ELFI Rate Disclosure:

Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. Interest rates current as of 10/13/2023. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.

ELFI Rate Disclosure

Education Loan Finance is a nationwide student loan provider offered by Tennessee based SouthEast Bank. ELFI is designed to assist students financially with receiving their education. Subject to credit approval. See Terms & Conditions. Interest rates current as of 12/11/2023. Variable interest rates may increase after closing but will never exceed 18.00%. Interest rates may also differ from the rates shown above. The term of your loan, financial history, and other factors, including your cosigner’s (if any) financial history can affect the interest rate. For example, a 10-year loan with a fixed rate of 7% would have 120 payments of $11.61 per $1,000 borrowed. Rates are subject to change.

College Ave Rate Disclosure

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation.
Minimum loan amount $1,000, as certified by your school and less any other financial aid you might receive.
This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 1/1/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

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