As I mentioned in my last update post, Rachel and I refinanced our student loans last month. It seemed like a lot of work at first, but the draw of cutting the interest rate proved too irresistible, so we took the leap. How’d we make out? Let’s take a look!
Refinancing: What Even Is It?
No, it’s not that bad, I promise! Simply put, refinancing is when you have Bank A pay off your loan at Bank B because Bank A can give you a better deal on the money. For example, let’s say you have a student loan through Sallie Mae. Let’s say that loan is $30,000 with an interest rate of 10.5%. If you made the $332 minimum payment on that loan every month for a period of 15 years, you’d end up paying $29,692 just in interest. That’s on top of the $30,000 you originally borrowed! But, if you can refinance the loan, say through a bank like Superheroes Anonymous bank, they might be able to offer you something like an interest rate of 5.99%, which brings your payments down $79 every month and saves you $14,000 in interest payments over the same 15-year period. That’s effectively wiping out half the interest, just by switching who you owe the money to!
Is It Realistic?
Yup. I used those example numbers because those were our numbers! Well, mostly, anyway. Don’t you wish you would have worked with us now, Sallie Mae?? Honestly, if you have decent credit and your current rates are above 6-7%, it’s worth looking into refinancing. It doesn’t take much time at all, and we never had to even pick up a phone, let alone go somewhere or find a fax machine. The internet is a magical place, guys.
What’s the Catch?
There are a few reasons that refinancing might not be a good idea for you. Here are some:
- You’re toward the end of a loan forgiveness program – If you’re in a public service program that includes your loan being forgiven at the end of ten years or something similar, that benefit goes away if you refinance. If you’re planning on paying it off in three years anyway, that may not be that big of a deal, but if you’re on year 9, it’s probably worth sticking it out to have the balance forgiven.
- You’re on an income-based plan – Again, this little feature is only available for federal loans. If you refinance, you’d be moving into a privately financed loan and leaving the IBR behind. If you’re already strapped for cash every month, the terms on a new loan might be more than you can handle.
- Your interest rate is already low – Refinancing really only does two things: lower the interest rate or lengthen the loan. Since I’d never advocate staying in debt longer than you absolutely have to, a lower interest rate is what we’re going for here. But if you’re on a subsidized loan, or just had a really good rate to begin with, you’re not going to gain anything by moving your debts around.
Sounds Good, How Do I Refinance?
If you think refinancing might be right for you, there are a couple of ways to do it. You can go with a direct lender, like SoFi or CommonBond, or you can do what Rachel and I did and go through Credible. Credible is like Kayak for student loans, letting you put your info in once to get rates from up to 8 lenders. They made things super easy, and like I mentioned before, we never even had to pick up a phone to finish the process. If you do need help, their customer service team is all about helping from what I’ve read of other people’s experiences. They have web-based chat, can call or text you, and email is always an option as well. The basic idea is this: you’ll let your prospective lenders know the amount you’re wanting to refinance and some other info about your financial situation. This will involve a credit inquiry, so be ready for that, and if you’ve recently frozen your credit due to the Equifax breach, you’ll want to get that unfrozen before you start this process. They’ll get back to you with the terms they’re willing to offer, so pick one that works for your situation. Once that’s done, you sign some paperwork, they pay off your current loan, and you start making payments to them instead. Easy peasy!
Some things to look for when considering a refinance offer:
- Always go for fixed vs. variable interest rates – Variable rates might be more attractive at the outset, but keep in mind that our economy is growing, and lending rates are going up as a result. Don’t agree to a refinance loan that might end up costing you more than the one you were trying to get away from! And don’t listen to the “but if you pay it off fast, you can take advantage of that lower rate!” nonsense. If you can pay it off that fast, interest won’t be an issue anyway. We’re betting against risk here, and risk is not your friend when you’re trying to get out of student loan debt.
- Don’t lengthen the term any more than necessary – Free yourself from debt like a gazelle from the hunter. That means fast. For our refinance, we opted for a slightly longer term because the current minimums were preventing us from making a whole lot of progress on the smaller debts, but we’re not “freeing” that money up completely. It’s still going to debt. The 15-year loan we signed up for will be paid off long before it’s due, God willing, but this way, it won’t last more than 15 years. Think of whatever term you opt for as your max debt sentence. How long are you willing to continue forking over your paycheck every month? The best way to guarantee you get out of debt the fastest is by writing it in that way.
- Recognize that refinancing is just that – Refinancing doesn’t do anything in itself. It’s simply restructuring your debt. If anything, it might actually add to the pile if there are fees incorporated with your refinance agreement. Just because you put some better shoes on doesn’t mean you don’t still have to run the race. Get after it, and use the better position to your advantage!
Refinancing student loans isn’t for everyone, but it has the potential to make a huge difference in situations like ours. Have you refinanced your loans to rearrange your financial life? How was your experience?