When Refinancing Your Student Loans Can Backfire

If you’re looking for a way to make your student loan payments more affordable, chances are you’ve looked into or heard of student loan refinancing options.

Borrowers with federal student loans can refinance by taking out a Direct Consolidation Loan, or they can take advantage of some non-federal refinancing out there. Keep in mind that most private consolidation options will require a credit check of some sort. If you have a good credit score, that could be great news since you’ll get an even better interest rate. But if you have bad credit, refinancing may actually be more expensive than sticking with the loans you have now. (You can check your credit scores for free on Credit.com to see where you stand.)

It’s possible refinancing will cost you a lot of money if you overlook crucial components of what your new deal will look like. Make sure you’ve considered the possible impact of this decision before you apply by reviewing the benefits of your loan in its current state.

1. A Longer Loan Term

If refinancing means you’ll increase the length of your repayment period, you may end up paying more in interest, even if your new interest rate is lower than your current rate. Do the math before you commit: Compare your monthly payments but also look at the lifetime cost of the debt.

For borrowers looking to make their monthly payments more manageable, it’s a good idea to look into income-based repayment plans and potential loan forgiveness programs.

2. Losing Out on Loan Benefits

On the topic of loan forgiveness: Refinancing your loans means you might lose certain benefits. It depends on your type of loans, but such benefits include interest rate discounts, principal rebates and loan cancellation. Familiarize yourself with your loans’ offerings before you refinance.

3. Your Repayment Strategy

There are startups determined to make student loan refinancing more accessible to borrowers, though they’re generally most beneficial for borrowers with private loans. Still, you may qualify for rates lower than what you’re currently paying on your federal loans, particularly if you opt for a variable rate. It’s a risk, but if you plan on quickly repaying your student loans and want to minimize how much you pay in interest, refinancing at a variable rate may save you the most money in the long run. Keep in mind your monthly loan payment will fluctuate with rates, which may make it trickier to budget.

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Christine DiGangi covers personal finance for Credit.com. Previously, she managed communications for the Society of Professional Journalists, served as a copy editor of The New York Times News Service and worked as a reporter for the Oregonian and the News & Record.