Refinance to Regain Control
Refinancing my student loans was crucial to getting my massive debt problem under control. Taking out private student loans without anyone to cosign resulted in some pretty high interest rates. The highest rate was 10.49% on a $11,731 loan. After I compiled all of my loans, I realized I could refinance over half my loans at a better rate.
Using some handy refinance calculators (like this one at lendedu.com), I found myself refinancing $113,222.63 with SoFi! The weighted average of my loans before refinancing was 8.4%, but with the refinance that came down to 6% (including their awesome auto-pay discount). This 2.4% change is projected to save me over $15,000 in interest payments over the life of the loan.
And yes, I’m going to pay this down much faster than the minimum payment so I’ll be saving even more than that. Still, it’s amazing how much of a difference only a couple percentage points can have!
Consider the Drawbacks
However, there are certainly some drawbacks to refinancing any loans that must be considered.
First, refinancing only makes debt more manageable – it does not remove the debt. Often times, people can feel like they’re “doing something” about their debt by refinancing, but they’re not. Really, just as much money is owed after refinancing as before refinancing, there’s just less in interest to pay.
As someone who maintains that paying the minimum is never enough, it’s imperative the debt be attacked, and attacked hard. Attack it hard even with a 0% refinance (hey, a guy can dream).
I actually know some people who refinanced only so they could lower their monthly payment and eat out more often. In fact, they actually elected for a longer payback period than they originally had just so they could lower their payments (which they weren’t having trouble paying). Don’t be that person.
People like that have no intent on getting out of debt sooner. They don’t care about personal finance or financial independence. They just want to pretend it isn’t as bad as it actually is so they can buy more useless stuff, even if that means staying in debt even longer.
Watch Your Options
Furthermore, refinancing can take away some valuable options, depending on one’s income situation. This is because student loans that are guaranteed by the government come with some helpful repayment options. Some of these options can be lost by refinancing with a private company.
A common example of this is the income-based repayment plan. This type of benefit can be granted to direct subsidized and unsubsidized loans. For example, if someone can’t make the standard payments because his or her income is too low, this program will change the monthly payments to coincide better with their monthly income. Switching to a private refinance company could take away this benefit. Because of this, see what the options are before making the final decision.
A lower interest rate doesn’t mean much if the monthly payments still can’t be paid!
Another drawback is the delayed gratification of paying down loans that are lumped together in a refinance.
Suppose I had five student loans at $2,000 each and then refinanced them into one student loan worth $10,000.
In the first case, a payment of $1000 each month would only take two months to pay down the first loan. In the refinanced case, it would take ten months to pay down the combined refinanced loans. Sure, the same amount of money is paid over the same amount of time, but the time to payoff is different.
This is one reason that I’m not a big fan of consolidating loans (which is not necessarily the same as refinancing them). Often, companies will offer to consolidate every loan into one single loan, where the interest rate for that single loan is a weighted average of all the individual loans. This is mathematically equivalent to paying off the loans individually, but with the “ease” of only making one payment.
I like flexibility, so I would never consolidate my loans into a single loan without also refinancing them into a lower interest rate.
Don’t Pay the Fees
Also, I would never pay of a fee for refinancing my loans. Plenty of “old-school” companies still try that kind of stuff, but I refuse to fall for it.
The fact is, new finance/tech (aka fintech) companies are popping up all the time (thanks, Silicon Valley). They serve the same purpose as those “too big to fail” banks with respect to refinancing, but without charging the ridiculous “finder fees.” They’re making enough money off the interest I’m paying them, so they can cool it with the extra fees. Gone are the day of poor refinancing options, which is why I recommend sites like lendedu.com that provide options that benefit everyone.
Just Say No to Variable Rates
Lastly, I stay far away from variable interest rates. Watch The Big Short and you’ll understand why. I’ll be playing it safe with fixed interest rates every time. Variable rates just aren’t worth the risk, and fixed rates don’t make me guess what I’ll be paying each month. Click here for a detailed article describing the difference between fixed and variable rates. Plus, with the Fed raising rates every few months lately, those variable rates just keep going up!
The bottom line is, while student loan refinancing might not be right for everyone, it’s probably right for most people. As long as they’re able to find lower rates and don’t see it as a quick fix, they should be just fine.
Have you refinanced recently? What kind of rates have you been seeing? Let me know in the comments!