Everyone Should Consider Student Loan Refinancing - The Broke Professional

Everyone Should Consider Student Loan Refinancing

Unshackle your life

Unshackle your life

Few opportunities in life will allow you to keep more of your own money year after year with very little work on your part.

You can call your cable company to negotiate a better price.  That can save you $50 bucks or so per month.  But you have to look for new deals every few years and stay on top of the company to make sure they don’t tack on any extras.

Negotiating down a price for a car is another example.  You can potentially save thousands of dollars off the sticker price, but cars go way down in value anyway and you have to rinse and repeat when it’s time to buy another one.

These are both great ways to save money but do require a good amount upfront work and some checking in to make sure you’re not getting fleeced.

But for recent graduates with student loan debt, there is an even better way to create perpetual savings with very little work or maintenance:

Refinance your student loans.

Why You Should Consider Refinancing

Student loans are a big problem in this country.  While student loan interest rates are not nearly as high and murderous as credit card rates, a LOT of people are saddled with student loan debt and the amount of debt is pretty high.  Professional school debt can easily get into six digits (hence, The Broke Professional)

How high?  About $1.3 trillion.  You can even see it go up every second if you have some free time.  Pretty cool.  But also NOT COOL.

The other big issue is that it can take time for many graduates to actually get their careers going.  But lenders really don’t care.  They will give a few months grace period and then you need to start paying.

There also used to be a time when student loan interest rates were really low.  During my undergraduate years in the early 2000’s they hovered around 1-2%.  Now the rates are around 5-7% or even higher depending on the type of loans you take out.

So higher rates and higher balances that affect a large chunk of the population.  This is a problem.

Student loan refinancing is a great potential solution.  While it may not be the final solution for everyone (some value the various government benefits that come with federal loans), every single person with student loan debt needs to look into refinancing.

Refinancing may not be the right option for everyone.  But it doesn’t hurt to get some quotes and find out!

Benefits of Refinancing

Some people are a little confused about what a student loan refinance is.  Really simply, the company you decide to refinance with will send a check to your original lenders and pay off your loans.  You are now a customer of the refinancing company and you have to make payments to them.

Pretty simple, but what are the benefits of moving your debt from one entity to another?  There are many, but the biggest benefit is that you will (most likely) be paying much less in interest payments over the life of the loan.  The bigger the interest rate difference from your original lender and your new lender, the more beneficial refinancing will be for you.

Depending on the interest rate difference and the amount of your balance, you can potentially save a lot of money.

As a real life example, let me walk you through how much I saved with my refinance.  Since my time in school spanned some interest rate changes, I had some loans with lower rates and some with higher rates.

I decided it would be most beneficial to refinance my one loan which had a higher interest rate than the rest and had the largest balance as well.  Let’s do some simple math to check out the savings I received:

Original loan:  $36,667 @6.8% interest

Original term:  25 years

Total payments:  $76,346 ($39,679 interest)

That’s a long time to be in debt and a lot of extra interest to pay.  Now here are the terms of the refinanced loan:

Refinanced loan:  $36,667 @3.45% interest

Refinanced term: 20 years

Total payments:  $50,811 ($14,144 interest)

So over the life of the loan, I would end up saving $25,535 in interest payments!

With the refinanced loan, I had the option of a 5, 10 or 20 year term.  For the sake of the example I showed the 20 year term since the monthly payments were just slightly higher than the original loan.

Simply getting a lower interest rate with pretty much the same monthly payment would save me about $25,000 over the life of the loan!

But I want to get out of debt quick, so I went with the 5 year option since I could handle the increased monthly payment.  Going with this option will save me $36,374 in total payments.  I’m liking the sound of that.

I only had one loan with an interest rate of 6.8%.  Graduates nowadays have multiple loans with interest rates around 6%.  Being able to refinance their entire balance with an interest rate cut in half can produce significant savings.

Another great benefit of going with a new company to refinance your student loans is better customer service.

I’ve dealt with a number of refinance companies and every single one had better customer service than my original lender, whose customer service is almost non-existent.

My original lender would do shady things like apply extra payments towards interest and not the principal, even though I specifically asked them not to.  And it took forever to get a live person on the phone.

Many of these new refinance companies are young and growing, so they put customer service at the forefront of their business plan.  My two favorite companies, SoFi and Earnest, have phenomenal customer service and very user friendly websites.

Who Should I Refinance With?

There are a lot of student loan refinance companies popping up nowadays, but the two that are at the top of the industry and that I highly recommend are Earnest and SoFi.  They are essentially 1 and 1A.

If you’re already convinced and want to get the refinance train moving, click here to get a quote from Earnest, the company that ultimately got my business on my first refinance.  (If you end up getting approved for a refinance by using this link, we both get a $200 bonus)

I also recommend clicking through SoFi, as they have slightly different underwriting standards and you may receive different quotes from either.  (If you use this link and get approved, you will get a $100 bonus)

I would suggest comparing the two and going with the company that gives you the most favorable rate.  They are both very good.

If you still need a little more hand holding, my next post will detail the step by step process of refinancing your student loans and I will tell you why I went with Earnest for my first student loan refinance.

Until then, get some quotes and save some money!

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Comments

  1. I think it’s worth considering for everyone, but if you have plans on going to grad school full-time you might want to think twice before refinancing. You might want to defer your loans, and if you refinance you could lose those rights. Honestly probably a small percentage of people this applies to, but something to consider.

    • Good point David. I was targeting those graduates who know they are done with school. Like I mentioned federal loans have some benefits like deferral that would apply to some people. But if you’re done with school, or even if you may not go back for a few years, looking into refinancing is an option. Deferring too long is just going to shoot up the interest payments. Thanks for the comment.

  2. This is good advice! A lot of people out there can benefit a lot form refinancing, they just won’t take the time to explore it. If you plan to pay your loans over the full period, it becomes even more important to get your interest rate lower if possible!

    • Exactly right. I’m surprised a lot of times when I let my colleagues know of this option they kind of shrug it off and say they will look into it. I would be RUNNING to the computer if I learned of a new way to save money on what I’m already paying. To each their own I guess!

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