It’s fairly common advice given to students and recent graduates: If you’re paying off debt, refinancing your loans is one of the smartest things you can do.

There are many benefits to refinancing your loans including getting a lowered rate, releasing you cosigners, and be able to consolidate your loans. Your new loan could have smaller monthly payments over a longer period of time, or the payments will be the same but you’ll pay less interest.

If you continue making your original monthly payments after refinancing, you’ll also pay off your loan faster. You can use the extra cash from those smaller payments to fund an emergency fund or start a retirement portfolio.

With more than 40 million Americans paying off student loans, it’s a wonder that more people don’t end up refinancing. Decreasing a loan by even one percent can shave off hundreds or thousands of dollars.

So why do students and recent graduates avoid refinancing? Read below for our theories.

1. Federal Loan Fears

Many hesitate to refinance if their loans are public. Federal student loans come with some protections that you lose if you refinance. Since the federal government only offers consolidation – not refinancing – you have to go through a private company (like those on LendKey’s platform) if you want to refinance.

Federal programs offer a variety of payment plans, including deferment and loan forgiveness programs. You have to do your research, as only certain professions are eligible for forgiveness. These can be a big draw for people struggling to make their payments each month. Once you refinance your loans, you can’t go back.

If you are eligible for a government forgiveness program, do the math before you refinance. It may be worthwhile to stick it out since you’ll have your loans forgiven after 10 years in public service. You’ll have to pay taxes on the amount forgiven, so include that figure in your estimate. A tax specialist or financial adviser may be able to give you more specific answers.

2. Refinancing or Consolidating?

Some students get refinancing and loan consolidating confused, and end up avoiding the topic altogether. Most students are trying to think about their debt as little as possible, so it’s pretty common for borrowers like this to avoid going into detail about the loan repayment process.

When you consolidate your loans, you group them together so there’s only one payment. Sometimes you can also get a lower interest rate, but consolidation is mostly done to simplify the process.

Refinancing, on the other hand, is a new loan with different rates that you use to pay off the old loans. Federal loans can be consolidated, but not refinanced. So which is better?

The answer largely depends on your financial situation, as well as the number of loans you’re currently paying back. Borrowers who have recently improved their credit are typically good candidates for refinancing, whereas those paying a number of different loans should consider consolidation.

Here’s a more in-depth analysis of the difference.

3. Credit Score Effects

LendKey recently started offering rates without pulling a hard inquiry on your credit report. Why is this important?

Any time you take out a loan or try to get a refinance offer, you risk hurting your credit score. This means that if you look at a variety of companies to get a quote, you might end up harming your reputation as a borrower. How does this work?

Normally, every time a lender accesses your credit report, you get a hard inquiry on that report. Hard inquiries can lower your score over time and often stay on your credit report for several years.

That’s why using a lender who doesn’t pull hard inquiries is so important. You don’t want to decrease your chances of getting a loan approved just by doing your due diligence. Plus, if you decide to get another loan in the future – like a mortgage – those hard inquiries can affect what kind of loan you’ll get.

4. Afraid of Risk

Risk tolerance factors include choosing a variable rate or a fixed rate, picking a longer-term loan instead of a short-term loan and more. If you’re risk averse, you likely don’t want to be in debt more than you have to. You also don’t want any surprises. Getting a fixed rate loan is crucial for risk-averse people who don’t want their monthly payments to change.

If you’re comfortable with risk, a variable rate loan might make more sense to you. You can likely get a lower rate than a fixed rate loan, but it might change over time. For people who aren’t afraid of risk, make sure you can afford to make your payments no matter what the interest rate is. That way you won’t find yourself defaulting on your loan.

5. Unaware of Refinancing’s Benefits

Refinancing is usually beneficial for anyone, but it can be especially helpful for recent graduates. Whether you’re just starting to look for a career after college, or you’ve spent years working a dream job, rethinking the way you’re paying off student loans can make a big difference to your budget. Refinancing student loans can help you manage your budget and make it easier to move forward with bigger, better goals after college. The money you could save at the end of the month is just one of the amazing benefits of refinancing your student loans.

Unfortunately, refinancing is not available to everyone. You have to be approved by the lender, who will most likely want to see a good credit score (often 700 or higher), gainful employment, and a history of on-time loan payments. You have to prove that you’re worth loaning money to.

If you get rejected or worry that you aren’t a suitable candidate, don’t panic – there are options available to you. You can ask companies to take collections, late payments, and other negative signs off your credit report. You can lower your credit utilization percentage, avoid taking out new lines of credit and pay off other debt. These will increase the odds that a lender will take a chance on you.

Before you refinance, ask your lender these questions:

  • Will there be a hard inquiry? A hard inquiry can ding your score and stay on your credit report for years, so always be careful with how you approach them. You can also find lenders that don’t use a hard inquiry.
  • Are there any fees for refinancing? Origination fees can often cost around 1% of the total loan amount. Make sure the fees cost less than your refinance savings. There may also be an application fee. Read the fine print, do the math and make sure you’re signing on with a lender that can truly save you money.
  • Will there be an extra fee if you repay the loan early? Sometimes lenders charge prepayment penalties if you pay your loan off early. It’s best to find a lender with no prepayment penalty. Loans can be stifling enough on their own, but the inability to pay them back faster can be a morale killer.
  • Is this a fixed rate or variable rate loan? There are two types of interest rates: fixed and variable. Fixed rates stay the same, while variable rates change depending on outside circumstances. Variable rates have a range they’ll fall in. Often, the lower end of the variable rate will be lower than the fixed rate loan. Before you choose a variable rate loan, make sure you can afford to make the payments if the interest rate goes up. You don’t want to be struggling to make your loan payments if interest rates change.
  • Should I refinance before or after I get a job in my field?

Refinancing does not have to be stressful or consume weeks of your time. Using a platform like LendKey actually makes the process pretty quick and painless. We connect you directly with reputable community banks and credit unions. This helps to ensure you receive personal service, community benefits, and online convenience every step of the way.

Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.