THE BLOG
12/05/2014 11:31 am ET Updated Feb 04, 2015

The 8 Biggest Misconceptions About Paying And Refinancing Your Student Loans

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Student loans can be a minefield. Many graduates put off refinancing their student loans simply because they don't understand the process. We launched Credible (a marketplace for student loan refinancing) because we witnessed our friends' and colleagues' frustrations about their student loans and lack of knowledge about options that exist to reduce their interest rate and repayments.

Here are the eight biggest misconceptions we hear about student loan refinancing.

1. You are stuck with your loans when you graduate

You're not necessarily stuck with your current loans forever. Many graduates refinance their federal and private student loans after graduation, or a few years into their career, once they have built a credit history. They do this because under certain circumstances, refinancing can result in lower interest rates, lower monthly repayments and significant savings. If you have a credit score of 640 or higher, you are potentially eligible to reduce your monthly repayments after you graduate.

2. Every lender offers similar rates

Nope. Depending on the lender, interest rates on student loan refinancing products can range from under 2.5% to well over 8.0%. Lenders offer products based on a graduate's personal situation - eligibility criteria usually depends on school, income, credit score and debt balance.

3. Refinancing at a lower rate will result in higher monthly repayments

This isn't true. In fact, we find that most people who refinance their student loans end up with lower monthly repayments, a lower interest rate (or APR), and a lower total repayment amount.

4. You can only refinance your student loans once

Borrowers can refinance as many times as they want. As your income or credit improves, you may become eligible for lower rates than those received in your last refinancing. As a result, it may make sense to explore refinancing at multiple points in your career.

5. Increasing the term of your loan always results in paying more interest

Not necessarily. Increasing the term of your loan may still result in less overall interest if you are able to decrease your rate. There are also no prepayment penalties. That means borrowers can take advantage of lower rates on longer term loans but pay them off as quickly as they are financially able with more frequent or larger monthly payments. The benefit of this approach is that borrowers can still maintain the flexibility to make the lower monthly payments of a longer term loan should new financial pressures arise.

6. You have to refinance ALL of your student loans

It is up to you to refinance whichever student loans you choose. At Credible, we regularly see graduates request refinancing for only their higher interest rate loans. Borrowers choose this option because refinancing the highest interest rate loans and leaving the lowest interest rate loans alone can sometimes be the best way to maximize total savings.

7. Shopping around for the best rate will hurt your credit profile

This is simply not the case. The credit bureaus treat "rate shopping" as a single credit pull. According to leading credit score calculator FICO:

In general, student loan shopping inquiries made during a focused time period (for example 30 days) will have little to no impact on your score

8. Consolidation and refinancing are the same thing

Student loan consolidation and student loan refinancing are two different things. Consolidation without refinancing generally means combining your existing loan payments into a single, weighted average payment. Refinancing your student loans though is the process of having a lender pay off all or some of your old student loans in exchange for a single, new loan from that new lender.

PHOTO GALLERY
States With Highest Average Student Debt - TICAS - Class Of 2012