So, you’re thinking about refinancing your student loans. You’ve heard all about the innovations in the student loan industry and are looking to get in on the savings and simplicity. You’ve got a pretty good idea of what’s out there, but still have questions and doubts about common myths in the student loan refinancing game. Before you start shopping around and applying for student loan refinancing, there are three important things you need to know.
Your Credit Won’t Be Adversely Affected—If You Refinance the Right Way
One of the biggest misconceptions people have when it comes to refinancing their student loans is that refinancing will hurt their credit.
The key to protecting your credit is to conduct your research and honestly assess your financial situation before you shop around.
When you receive prescreened offers (ones that say you’ve been pre-selected) the company sending the notice did a soft credit check, which doesn’t have an impact on your score.
This is different from when you seek to prequalify or fully apply to refinance your loans, which require hard credit pulls.
Applying for multiple offers over an extended period can impact your credit score — especially if lenders are not coding their inquiries properly — but this doesn’t mean you don’t have the freedom to compare your options: In general, when you have a hard credit pull, you have 30 days to make inquiries, which means other lenders checking your score for this same reason during this period can do so, and it won’t hurt your score, according to myFico, which is affiliated with the credit reporting agencies Experian, TransUnion, and Equifax.
As for research before seeking to prequalify or to apply, personal finance forums like Reddit and Quora and online communities for your profession may be good places to see how others in your specific situation fared in rates and benefits from lenders. This way you can narrow your list of potential refinancing partners and options.
Also helpful in terms of protecting your credit score: opting not to refinance your student loan in close proximity to other major purchases, filling out credit card applications, or employment changes that typically require hard credit inquiries.
Your Refinanced Student Loan is Still Tax Deductible
Before we get into tax details, please note:
Laurel Road does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
That said, refinanced student loans are still student loans. Depending on your income level and input from a tax professional, this means you may still be able to deduct the interest you pay on your refinanced student loans come tax time. This generally comes out to up to $2,500 for individual filers earning a modified adjusted gross income (MAGI) of less than $80,000.
If you are earning more, or even less than the MAGI ceiling, the amount you can save refinancing your student loans may make it an option worth considering.
(Again, please run this information by a tax professional, we are not qualified to offer tax advice.)
Consolidating a Student Loan is NOT the Same as Refinancing
Restructuring your federal student loans and consolidating them into a single loan, as offered by the federal government, is not the same as refinancing with a lender or consolidating private student loans.
The government has program for consolidating student loans using a Direct Consolidation Loan. There are some limits – for example, you can only use this program to consolidate federal loans, so you can’t use the program to address private loans.
Consolidating federal loans through a government program does two things: it gives you one payment to one service, and you keep the right to exercise options, like income-based-repayment plans, and you can change your repayment plan during the course of the loan.
However, this sort of consolidation may not save money for student loans take out after 2006. Federal Stafford and Plus loans before 2006 used to have rates that changed every year, and consolidation was a way get a lower rate and save on interest. Student loans after 2006 were fixed at a higher rate, and the consolidation process now averages the rates of the loans being .
Refinancing federal student loans – which means using a private lender – can save you money with a lower interest rate, but you lose the repayment benefits that are attached to the federal loans.
If you’ve already consolidated your federal student loans, and want to refinance these loans with a private lender, like Laurel Road, you can, but the same rules apply, the new, private loan does not include the repayment benefits of the federal loan.