Many moons ago, in the year 2011, I was several years of out college, had spent some time in the workforce, and felt like I finally had my feet soundly under me. I was renting my own apartment, driving a little Acura that I had paid off completely, and was at a state of heightened organization where all my bills were being paid on time and my finances were in order.
As for my student loans, I knew exactly who I owed, how much I owed, and the interest rates for each loan.
My highest interest rates on some of my loans were alarmingly high
and a whopping 14.25%!
The 14.25% was accruing on a loan for $3000. That meant each year I was paying $427.50 a year in interest, that’s $35.62 a month! If that had been my only loan it wouldn’t have been a huge deal, but altogether I had 10 loans, all with varying interest rates that were making my payments a moot point. It was two steps forward, one step back as more than half of my payments were going to interest. I was paying hundreds a month and making nary a dent in the loan principal.
At this time, I decided I desperately need to refinance and score myself a lower interest rate!
Luckily for me, just as I was pondering this I received a letter in the mail from a bank proposing that I do just that! I filled out the application online and awaited a response about my credit score they were pulling. Although my credit score wasn’t terribly low, there was something on my credit history that gave this new lender pause. I had been late on a payment for one of my student loans. This likely happened when I had just graduated, and was seeking employment.
I’ll admit that after graduating I ignored the task of sorting out my ten students loans and who was owed what. Feeling overwhelmed I would set the pile of bills to the side, pretending it would all go away.
Life Pro Tip: DON’T DO THIS! If you’re having trouble making your monthly payments, call your lenders and ask to be put on a manageable payment plan until you have your ducks in a row.
Back to my refinance rejection
I was sorely disappointed to realize that I wouldn’t be able to refinance at a lower rate. That meant I’d have to continue to slog away at these balances with crazy high interest rates, and maybe someday reapply. Since I knew it takes years for things like that to fall off your credit history, I all but forgot about the idea and continued to chip away at my loans for the next several years.
Eight years later, living in a home twenty miles south of my old apartment, I received the same letter from the same lender! Knowing, eight years later that my credit history would be much better, I decided to reapply to see what interest rate I would be offered. Of course, the flyer in the mail promised rates as low as 5% which seemed a solid win compared to the 7.5% and 8.50% I am paying on my current loans. I’m paying a little under a hundred a month toward interest, which is still too high in my book.
Below are my current balances and interest rates:
|Student Loan #||Balance||APR||Interest Per Year||Interest Per Month|
|Student Loan Total Balance||Total Interest Per Year||Total Interest Per |
The Application Process
While applying online, the application asked me to provide
the balance and interest rate for each loan
if the lender is private or public
if I had a co-signer (no)
and if the rate is fixed or variable (mind are variable).
I also had to enter my income, rent, years of employment, and years at my current residence.
I must have passed this part with flying colors because I was presented with a chart from which I could choose the repayment plan of my choice
|Repayment Length||Interest Type||Interest Rate|
Having options is always good. However, I am already on a trajectory to pay off my remaining balance $11, 410.84 in less than five years, so I knew I’d pick the lowest repayment length.
That was good news for me since it also offered the lowest rate of the four repayment lengths. I had already decided I would only refinance with a Fixed Rate, as well. With a variable rate, every time the Federal Reserve does a rate hike guess whose interest goes up? Mine! That means the interest on my loans is completely out of my hands, and, believe me, there have been several rate hikes in the past three years. Great for investors, bad news for the schmuck slogging away at their student loans.
This meant the only choice that made sense for me was the one that offered the
6.45% interest rate with a 5 year repayment period.
If you’ll recall from my math above, what I’m currently paying in interest on my $11,410.84 balance is:
Total Interest per year: $861.76 Total Interest per month: $71.81
With this new rate of 6.45% my stats would be
Total Interest per Year: $735.99 Total Interest per month: $61.33
Total Savings per year: $125.77 Total savings per month: $10.48
Better The Devil You Know…
I had to ask myself if saving $10.48 a month was worth the following:
Holding a large loan balance with a lender I was unfamiliar with
The servicer I have now is transparent, and easy to work with. The way my loans are set up online, it’s very easy to direct an early or over-payment. Their customer service is responsive, and I’ve had no problems so far with them. They were also very willing to work with me in the beginning when I was having a hard time paying my loans. I was placed on an interest only plan for a couple months while I got my bearings together. Should an unexpected hardship come up, I have no doubt they’d allow me to reduce my payments to interest only again.
Having my required monthly payment increase
With my current lender, my monthly required payment is only $89.00. The 5 year repayment plan with a 6.45% rate locks me in at a $200 monthly payment. Yes, the payments I actually make are much, much higher because I want to reduce my debt more quickly, but what if something happened to my current financial position, and making a $200 payment wasn’t feasible for a month or two?
The hassle of having the money moved
Sending my pay stubs and loan statements to the new lender’s underwriting department, combing through the application and signing it, setting up new online access and providing my bank account, waiting for the money to transfer between companies. This would all have to take place before I could resume making payments on my loan.
I preach about saving every little penny here and there, but I had to ask myself if it was just easier to stay on my current trajectory. The more I reduce my loan balance each month, the smaller the savings by refinancing at a lower rate. When my loans are at $5000.00 I’m going to be saving even less on a monthly/yearly basis with the refinance.
If I had been able to refinance earlier in the game when my balances were higher, and my interest rates also higher, I could have saved actual thousands over the last ten years.
As with all my money decisions I took several days to mull it over. I decided that for now, I’d hold steady where I’m at, but if the Federal Reserve initiates another price hike, I’d likely refinance.
For now, the plan is simple: throw as much money at these things as possible. The easiest way to reduce interest paid on the loan is continuing to aggressively pay down the principal.
I encourage everyone to do the math on their own student loan refinance.
Take these steps to find out if refinancing your student loans is worth it
1. Start an application, and let the new lender offer you a rate based on your credit history and income
2. Do the very simple math to find out if you’ll be saving money
3. Weigh that against the inconvenience of moving your loan.
When refinancing your student loans consider these 3 things
1. Are there loan origination fees?
The last thing you need is to spend any money whatsoever on refinancing your loan. The goal here is to save money. Hard pass if there are fees.
2. Are you able to make over-payments each month?
You DO NOT want to be locked in with a lender that only allows you to make the minimum payments each month. You will never pay those suckers off at that rate. Being able to make an over-payment means that if your minimum payment is $100, but you want to put $500 toward the balance, that you can do so. I overpay each month, and the amount is always different as it’s based on how much I was able to save each month after all my expenditures.
3. Do you benefit from having your loans consolidated?
If you have five loans with five different rates, and you’re aggressively paying them off in order of interest rate or balance size, having them all consolidated into one lump might cramp your style. Instead of throwing the majority of the payment at one loan and making the minimum payments on the others, you’ll have to make one large payment toward one large loan each month.
In short, do what works for you. Math doesn’t lie, but there’s a mental side to paying off debt that must be taken into consideration. Look at the big picture when considering how refinancing will help you reduce your student loan debt each month.