Forty million Americans have a combined total of more than $1.2 trillion in student loan debt - an average of about $30,000 per person. If you're looking for a way to simplify your payments and better manage your student loan debt, refinancing may be a good option.
When you refinance, you take out a new loan to pay off an existing loan or loans. If you qualify, the new loan may have better repayment terms, which could result in a lower interest rate, lower monthly payments and/or a lower total repayment cost.
But some critics point out that refinancing isn't available to those who really need it, such as those in lower income brackets who would benefit most from better repayment terms.
There's a lot to consider before refinancing your student loans, so let's bust four common myths about student loan refinancing.
Myth #1: Anyone can refinance student loans.
While this is technically true, each refinance company has its own set of eligibility requirements. Some require a minimum monthly income, a specific debt-to-income ratio and/or a minimum credit score. Citizens Bank, for example, requires a minimum FICO score of 660. In addition, some companies - such as SoFi and CommonBond - will only refinance your loans if you earned a degree.
The good news is that even if you don't qualify for student loan refinancing right now, making on-time payments is a positive step toward building your credit so you have a better chance of approval in the future.
Myth #2: You can't refinance federal loans.
You can typically refinance federal loans, but they must be refinanced into a new loan through a private lender - the Department of Education currently doesn't offer refinancing. However, if you choose to refinance your federal loans, you may lose many benefits and protections. For example, federal loans offer repayment options based on your income, which may be attractive if you're just getting started in your career.
If you work for the government or a qualifying nonprofit, you may qualify for loan forgiveness after you've made 120 qualifying monthly payments under a qualifying repayment plan. So if you refinance, federal loan benefits like these may no longer be available to you. Instead, you would be bound to the private lender's repayment terms.
Myth #3: Consolidating is the same thing as refinancing.
So this is where it gets a little confusing: While refinancing and consolidating aren't the same, refinancing can involve consolidating multiple loans. Let us explain.
When you refinance, you take out a new loan with new terms, interest rate and monthly payment amount. This might lower your monthly payment, lower your interest rate, or reduce the length of your loan term. If you have multiple loans, whether they're federal, private or both, you can consolidate these multiple payments into one through refinancing.
When you consolidate, on the other hand, you are combining multiple loans into one, so you have a single monthly payment - and it's a service offered by the federal government and doesn't cover private student loans. Consolidation doesn't change your repayment amount, nor does it lower your overall interest rate. However, it can extend the loan term, which means you might end up paying more interest over the life of the loan.
Myth #4: If you decide to refinance, you have to refinance ALL of your loans.
You can choose which loans you want to refinance. If you've got a mix of federal and private loans, for example, you may want to keep lower-interest federal loans and refinance any higher-interest private loans.
But interest rates can also vary among federal loans. For example, graduate loans typically have higher interest rates than undergraduate loans. (Some years have seen graduate loans above seven percent.) If this is the case, an option may be to refinance your high-interest graduate loans and keep your low-interest undergraduate loans as they are.
Refinancing your student loans can be a way to save money on interest and help you manage your monthly payments. Just be sure to do your research before you refinance to get the best terms possible and be aware that you may have to have an excellent financial profile in order to qualify for the best terms.
If you think refinancing your student loans could be right for you, check out these tips on how to choose the right lender.
Carrie Deakin is a copywriter at Credit Karma. When she's not wordsmithing, you'll find her in the weight room, on the balance beam or at a baseball game.
Editorial Note: The opinions you read here come from our editorial team. While compensation may affect which companies we write about and products we review, our marketing partners don't review, approve or endorse our editorial content. Our content is accurate (to the best of our knowledge) when we initially post it, but we don't guarantee the accuracy or completeness of the information provided. You can visit the company's website to get complete details about a product. See an error in an article? Use this form to report it to our editorial team. For questions about your Credit Karma account, please submit a help request to our support team.
Advertiser Disclosure: We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.
Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.
Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.