Wait, You Still Haven’t Refinanced Your Student Loans?

If you have student loan debt, you are losing money every day.  For example, if you have $100,000 worth of student loan debt at 6.8% interest, you are paying $6,800 in interest every year, or around $20 per day.

Of course, the best solution to this travesty is to annihilate your loans as fast as possible.  However, no matter how intense you are with your payoff, you will still be losing money in interest while the loan balance remains above zero.

Reduce the Money Hemorrhage

If you refinance your loan to a lower interest rate, you can reduce the money hemorrhage. For example, if you refinanced that $100,000 to 3.4%, you will be saving $3,400 per year, or around $10 per day.  Over a 5 year loan term, you will save over $10,000.  That’s money you could use to pay down the principal of your loan even faster, or start contributing to your Roth.

The Catch

Refinancing is a great deal.  It truly is free money.  Of course, anything free comes with a catch.  Here are the catches with refinancing:

1. You will no longer qualify for Public Service Loan Forgiveness (PSLF): The PSLF program is only available for federal loans, so if you refinance to a private loan, you will lose the ability to participate in this program.
2. You will lose Deferment and Forbearance benefits: The federal student loan program offers rather liberal protections for unemployment and other hardships. Some of the private refinancing companies also offer some protections, but they are not quite as lenient.

Not Everyone Qualifies

The last catch is that not everyone will qualify for refinancing, and not everyone will get the best rate.  Obviously, there is no point to refinancing if you are unable to get a lower interest rate.

The refinancing companies consider several factors when determining your eligibility and interest rate, including:

1. Income: Most companies will require proof of a stable job situation.  Also, the higher your income, the more likely you are to qualify.
2. Debt-to-income ratio: Don’t expect to be able to quality if you have $250,000 in loans and a job that makes $40,000 per year.
3. Your degree: I’m not sure how they use this exactly, but a degree in law or medicine may be considered more of a sure bet for them than a degree in English. Also, to my knowledge, none of the  refinancing companies will refinance loans from Associates degree or technical programs.
4. Your credit score: Most refinancing companies require credit scores at least in the mid to upper 600’s.  Obviously, the higher your score, the lower your interest rate.
5. Minimum loan amount: The minimum loan amount that the refinancing companies will consider  is usually $5000.  Of course, if you have less than $5000 in loans, then forget refinancing and just pay them off in a few months.

Which Company to Choose?

There are many companies offering loan refinancing, including Sofi, DRB, Lend Key, Common Bond, and Earnest.  I am not aware of any objective reviews for these companies.  In most cases, I would recommend applying to several to see who gives you the best rate.

For what it’s worth, I refinanced with Sofi and had a great experience.  But of course, your experience may vary, and I can not comment on the others.  I will say, however, that if you are a strong candidate (high income, high credit score), the different companies will compete for your business, so make sure to use that to your advantage to get the most competitive rate.

Which Loan Term?

When you apply for refinancing, you will need to decide on the length of the loan and whether to request a variable or fixed rate.

If you are serious about killing your loans, I would recommend the aggressive 5 year variable term. This will give you the lowest rate and encourage you to get used to putting a huge proportion of your earnings towards your future freedom.

Variable vs. Fixed Rate?

If you are concerned about the risk of rising interest rates, you could chose a 5 year fixed, but remember that you will have a higher interest rate.  Also, it is important to understand that the interest rate on a variable rate loan will have to rise quite a bit to be worse off than the fixed rate loan.

Think of it like this:

With a variable rate loan, your current interest rate will be lower than the fixed rate, so you will be saving money.  As the interest rate rises, it may eventually equal the fixed rate.  Even at that rate, you will still have paid less in total interest compared to if you had refinanced with a fixed rate loan. The variable rate must actually SURPASS the fixed rate, and surpass it enough so that you eventually pay more than the amount you saved thus far with the variable rate loan.

If you still prefer the security and peace-of-mind of a fixed rate loan, it’s probably not a big deal.  At Sofi, the current lowest 5 year variable rate at the time of this writing is 2.6%, and the lowest 5 year fixed rate is 3.4%, so it’s not a huge difference.

Bottom Line

Unless you are going for Public Service Loan Forgiveness, refinance your loans TODAY.  Apply to several companies, and choose the one with the best rate.  Interest rates are rising, and the longer you wait, the higher your interest rate will be and the longer it will take to pay off your loan and earn your freedom.

Remember, it’s Not About the Money; It’s About the Freedom