Author Topic: Expecting a good salary increase; Refinance a student loan now or later?  (Read 3003 times)

SaveALLTheThings

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I just graduated college 2 months ago and I have about 30k in private student debt at 8.75%.  Right now I'm working on an internship equivalent to about $40k per year, and I'll be moving on to a job for about $65k per year at the beginning of September.  I'm thinking of refinancing this debt into a variable rate loan, which start at around 3.75%. That could potentially be a big savings on interest.  I also have 30k of federal loans which is locked in at 6.8%. I'm planning on just throwing as much money as possible at these loans, prioritizing whichever has a higher interest rate at the time so I can pay them off in less than 2 years.  I don't think the prime rate will take off like a rocket ship next year, so I feel pretty comfortable with the variable rate loan.

Does it make more sense to refinance now or wait until I'm making more money with the other job?  How big of a difference could the extra 25k make  on the interest rate they offer? What kind of proof will they need for my income?  I ask because if they need 2 pay stubs or something, I'll have to wait until I've been working at the new job long enough to have received them.  I also have 3 years of credit card history and have always payed my balances in full.

I guess the really question is, which is a better savings:
Refinance now: The interest at rate A for ~15 months starting now.
Refinance later: 8.75% for 2 months, then switch to rate B for ~13 months.  Most likely rate A is higher rate B but by how much is unknown. 

Also, if I refinance I'll lose the grace period status ending in November, but since I'm already paying the loan back aggressively that's not a huge deal.

What are your thoughts?
« Last Edit: July 17, 2013, 10:31:52 AM by SaveALLTheThings »

BuzzardsBay

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I have two questions.  The first is, how long do you plan on taking to pay all of these student loans off?

The second is, where do you expect interest rates to go from here?  They're at historical lows with no place to go but up. 

I know your current rate is higher.  But I think refinancing depends on how long you're going to take to repay.  Figure out a schedule you can live with and do the math and I think that will give you the answer.

Rebecca Stapler

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I just graduated college 2 months ago and I have about 30k in private student debt at 8.75%.  Right now I'm working on an internship equivalent to about $40k per year, and I'll be moving on to a job for about $65k per year at the beginning of September.  I'm thinking of refinancing this debt into a variable rate loan, which start at around 3.75%. That could potentially be a big savings on interest.  I also have 30k of federal loans which is locked in at 6.8%. I'm planning on just throwing as much money as possible at these loans, prioritizing whichever has a higher interest rate at the time so I can pay them off in less than 2 years.  I don't think the prime rate will take off like a rocket ship next year, so I feel pretty comfortable with the variable rate loan.


How do you plan to refinance your student loan -- with an unsecured loan? Pay off with a home equity loan?

SaveALLTheThings

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How do you plan to refinance your student loan -- with an unsecured loan? Pay off with a home equity loan?

That's a good question.  I was thinking of doing a student loan consolidation even though I only have 1 eligible loan, and variable rate student loans seem to be an option in that case.  Would some other type of loan give me a better deal?

I have two questions.  The first is, how long do you plan on taking to pay all of these student loans off?

The second is, where do you expect interest rates to go from here?  They're at historical lows with no place to go but up. 

I know your current rate is higher.  But I think refinancing depends on how long you're going to take to repay.  Figure out a schedule you can live with and do the math and I think that will give you the answer.

While I know there's a risk that one day the interest rate could be greater than 8.75% on a variable loan one day, I plan on paying all loans back in less than 2 years.  I will be traveling 80% of the time with generous per diems so I will have almost no expenses.  The amounts I gave also include the accumulated interest.  I have no other debts.  Also, since I won't know what kind of rates I'll be offered until I apply, it's difficult to predict the best payment plan.  It also seems like there's no fee for variable rate loans and around 4% of the loan amount for fixed rate, so the fixed rate refinance definitely doesn't make sense (4% extra APR the first year + at best 6.5% rate)
« Last Edit: July 17, 2013, 12:31:46 PM by SaveALLTheThings »

Rebecca Stapler

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How do you plan to refinance your student loan -- with an unsecured loan? Pay off with a home equity loan?

That's a good question.  I was thinking of doing a student loan consolidation even though I only have 1 eligible loan, and variable rate student loans seem to be an option in that case.  Would some other type of loan give me a better deal?

I hate to break the news to you, but you can't refinance a student loan. You can pay it off with another type of loan, or consolidate it to the weighted average rate of all the loans you're consolidating, but those don't sound like viable options for you.

Before your grace period ends, pay off all the interest that will be capitalized at the end of the grace period. Then pick off your loans, starting with the highest interest rate or the lowest balance, whatever suits your fancy. If you pick off the lowest balances first, you will reduce your monthly minimum payments. If you pay off your highest interest first, it will save you the most money. Good luck!

neoptolemus412

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To concur with Stan, student loans don't consolidate unless it's a federal loan consolidation or you get behind in some way & the private loans apply a repayment plan.  You say you have $30K in private student loans. Number 1 thing is figuring out if you need/want more school in the next 10 years.  Since we don't know the actual loan terms, here's the most likely options.

You haven't started FT, so I would wait until you have a FT job with strong cash flow.  This way you can budget.  Know, it takes a few weeks for consolidations to go through in almost all cases, so if you have an offer sheet, you might start the process right after you start work.  Many jobs take at least 2 weeks before payroll kicks in, so don't want to have payments start with no income. 

If you don't plan on going to school anytime soon.  Just repay the loan & do an AR b/c it's the lowest interest.

1) 2 year pay off - probably $17500 a year (rough estimate including interest).  Adj. Rate is fine. 
2) 5 year pay off - probably $8,000 a year (same rough estimate).  adj. rate is ok.  Fixed offers protection. 

If the loan offers deferment options & doesn't accrue interest during school, then you might consider not repaying the loan in full to save for grad school expenses.  However, THIS IS ONLY IF YOU KNOW FOR CERTAIN YOU'RE GOING TO SCHOOL AGAIN.  Otherwise, kill that loan.  I would personally pay it off anyway as student loan debt is dischargeable in bankruptcy & lenders can make life hell for you if necessary.