Refinanced Student Loans to less than 1% Interest

[zombiehunter]

Previously I was able to refinance my student loans from Federal Stafford from ~6.8-7.9% (criminal!) to SoFi, which dropped the rates to ~ a variable 3.25%, which then crept up to 3.5% after the Fed raised interest rates (better, but made me somewhat nervous when interest rates appeared to be on the rise).

Recently First Republic Bank did a pitch at our office, indicating that they have a somewhat different model than SoFi and the other student loan refi companies: 

• (1)  assuming you qualify (they are looking for at least 2 years of employment, student loans from good universities, and professionals working in medicine, law, dentistry and business), everyone gets the same interest rate.  This is not like SoFi who gives you an interest rate based on your individual credit profile. 
• (2) they claim they are not looking to make lots of money refinancing loans, but are looking to establish a relationship with high earning individuals so that hopefully you come back to them for your car/home loan in the future.  This is pretty much evident from their interest rates -- for example, 1.85% variable over 5 years or 1.95% fixed over 5 years.  Even at 10 years they would be my old SoFi rate by at least half a point, and they offer a fixed rate that is significantly less than the SoFi variable rate. 
• (3) If you prepay your loans in less than 4 years/48 months, they will give you a rebate of the actual interest you paid up to 2% of your initial loan amount. 

In my case, 2% of the refinanced $82k is $1,640.  They also give a referral credit of $200, so me and my colleague were each able to pick that up. 

Compare:
SoFi $82k loan @ 3.5% interest, 10 year loan paid over 4 years --> Total interest paid is ~$5,700. 
vs.
First Republic $82k loan @ 1.95% interest, 5 year loan paid in 4 years (requires an additional $400 payment monthly) --> Total interest paid is ~$3200.

Subtract $1,840 from the rebate and the referral, and the total interest paid drops to $1,360.  This is roughly equivalent to a 0.8% loan.  I could work on pre-paying the loan even faster, such that the total interest paid is equal to the 2% rebate, and essentially have a zero percent loan.  But with the interest rate this low, and the rate fixed, I'm leaning toward socking more money away in additional NetSpend accounts at 5% (taxable) interest, or in taxable Vanguard ETFs. 

https://www.firstrepublic.com/fundyourdreams

If anyone decides to put in an app, send me a PM and we can work out a referral.  First Republic only refi's professionals with grad loans in their geographic markets, which roughly include LA to SF and Boston to NY.  So far, I've been pretty pleased with their customer service. As a bonus, I got a debit card that refunds any ATM fees. 

[Mr. Green]

That's a sweet student loan deal! I hope you are maxing your retirement accounts though. 20k a year is a lot to dump into a loan with less than a 2% interest rate. Unless the thought of having those loans drives you crazy you'd likely see a better long term return by making the minimum payment and dropping all the extra into the market.

[onecoolcat]

Do you know if they do Florida?

[Blonde Lawyer]

That's a great deal! I just checked them out online and the minimum loan is $60,000.  Too bad.  I have $28,000 left.

[forummm]

That's a great interest rate. But for <2%, I might not pay it off that quickly. Up to you. Being debt free is nice. Having some savings is nice too though.

[Metric Mouse]

That's a great deal! I just checked them out online and the minimum loan is $60,000.  Too bad.  I have $28,000 left.

Oh wow. Yeah, that's a much different market segment than I was in. Good work zombiehunter! For you, this is a fantastic deal. Thank you for sharing; I hope this information can be used by lots of posters on this site.

[KittyFooFoo]

Wow.  I'm refinancing $132k and SoFi was offering 4.4% for 15-year.

I will try to swing by their office today (looks like they prefer you to come in person). Thanks!

[zombiehunter]

That's a sweet student loan deal! I hope you are maxing your retirement accounts though. 20k a year is a lot to dump into a loan with less than a 2% interest rate. Unless the thought of having those loans drives you crazy you'd likely see a better long term return by making the minimum payment and dropping all the extra into the market.

That's a great interest rate. But for <2%, I might not pay it off that quickly. Up to you. Being debt free is nice. Having some savings is nice too though.

That's a good point.  I could make min. payments (~$1400 per month) and pay it off in 5 years @ 1.95%.  The extra $400 per month in additional payment, over 4 years, as you point out, totals $19,200.  For that, I get a rebate of $1,600, and save about $2,300 in interest (not that much in prepayment savings because the interest rate is so low).  So I think of it as a return of $3,900 on $19,200, or essentially an ROI of ~20% over 4 years... divided by 4 year, it's still healthy ~5% annually (tax free, although unfortunately I don't qualify for student loan interest deductions due to income).  Is this a reasonable way to evaluate the prepayment? 

I am currently maxing out tax-advantaged retirement accounts (401(k) at $18k, my own Roth IRA at $5.5k and wife's Traditional IRA at $5.5k. I missed the boat on HSA during open enrollment last year, so I plan to do that next year for another $6k. Total tax-advantage savings then amounts to ~$35k per year).  If the choice between student loan prepayment or taxable investment is fairly equal, the psychological benefit of being debt-free in 4 years tips the scales.   

[zombiehunter]

Do you know if they do Florida?

I started to say I don't believe so, but it does appear they have a branch in Palm Beach, so it would be worth an inquiry. 

[zombiehunter]

Wow.  I'm refinancing $132k and SoFi was offering 4.4% for 15-year.

I will try to swing by their office today (looks like they prefer you to come in person). Thanks!

Nice!  The transition was fairly painless for me from SoFi, it took about 3 weeks but that was partly complicated by me being out of town. 

[tonysemail]

thanks for posting this OP! 
I mentioned this to a friend and they were super enthusiastic about refinancing :)

In the FAQ section, it mentions more fine print like you have to direct deposit your paycheck with them and use their billpay service.

[zombiehunter]

thanks for posting this OP! 
I mentioned this to a friend and they were super enthusiastic about refinancing :)

In the FAQ section, it mentions more fine print like you have to direct deposit your paycheck with them and use their billpay service.

That's correct, you have to deposit at least some of your paycheck via DD, but there was no required amount.  I set mine up to cover the monthly payments.  Also you have to keep $3500 in the checking account in order to avoid the monthly service fee (which I believe is either $25 or $35 dollars). 

[KittyFooFoo]

thanks for posting this OP! 
I mentioned this to a friend and they were super enthusiastic about refinancing :)

In the FAQ section, it mentions more fine print like you have to direct deposit your paycheck with them and use their billpay service.

That's correct, you have to deposit at least some of your paycheck via DD, but there was no required amount.  I set mine up to cover the monthly payments.  Also you have to keep $3500 in the checking account in order to avoid the monthly service fee (which I believe is either $25 or $35 dollars).

$25, I asked the rep about this on the phone. 

They have a few other requirements:
* 750+ credit score
* You must be liquid to the tune of 10% or 15% of the loan (one of the two, not sure which). 
* Sufficient net income after rent/car loan/other debt, relative to loan

[zombiehunter]

thanks for posting this OP! 
I mentioned this to a friend and they were super enthusiastic about refinancing :)

In the FAQ section, it mentions more fine print like you have to direct deposit your paycheck with them and use their billpay service.

That's correct, you have to deposit at least some of your paycheck via DD, but there was no required amount.  I set mine up to cover the monthly payments.  Also you have to keep $3500 in the checking account in order to avoid the monthly service fee (which I believe is either $25 or $35 dollars).

$25, I asked the rep about this on the phone. 

They have a few other requirements:
* 750+ credit score
* You must be liquid to the tune of 10% or 15% of the loan (one of the two, not sure which). 
* Sufficient net income after rent/car loan/other debt, relative to loan

Interesting, I was not aware of the liquidity requirement.  One thing I'll point out is that they did not have any issue with my credit report, which features a solid score (750-800), but 12-15 inquiries and new accounts over the past year due to churning credit card bonuses (of course with a low utilization). 

[zombiehunter]

That's a sweet student loan deal! I hope you are maxing your retirement accounts though. 20k a year is a lot to dump into a loan with less than a 2% interest rate. Unless the thought of having those loans drives you crazy you'd likely see a better long term return by making the minimum payment and dropping all the extra into the market.

That's a great interest rate. But for <2%, I might not pay it off that quickly. Up to you. Being debt free is nice. Having some savings is nice too though.

That's a good point.  I could make min. payments (~$1400 per month) and pay it off in 5 years @ 1.95%.  The extra $400 per month in additional payment, over 4 years, as you point out, totals $19,200.  For that, I get a rebate of $1,600, and save about $2,300 in interest (not that much in prepayment savings because the interest rate is so low).  So I think of it as a return of $3,900 on $19,200, or essentially an ROI of ~20% over 4 years... divided by 4 year, it's still healthy ~5% annually (tax free, although unfortunately I don't qualify for student loan interest deductions due to income).  Is this a reasonable way to evaluate the prepayment? 

I am currently maxing out tax-advantaged retirement accounts (401(k) at $18k, my own Roth IRA at $5.5k and wife's Traditional IRA at $5.5k. I missed the boat on HSA during open enrollment last year, so I plan to do that next year for another $6k. Total tax-advantage savings then amounts to ~$35k per year).  If the choice between student loan prepayment or taxable investment is fairly equal, the psychological benefit of being debt-free in 4 years tips the scales.   

Bump for this -- is this a reasonable way to consider the "ROI" for prepayments? 

[MustachianAccountant]

That's a good point.  I could make min. payments (~$1400 per month) and pay it off in 5 years @ 1.95%.  The extra $400 per month in additional payment, over 4 years, as you point out, totals $19,200.  For that, I get a rebate of $1,600, and save about $2,300 in interest (not that much in prepayment savings because the interest rate is so low).  So I think of it as a return of $3,900 on $19,200, or essentially an ROI of ~20% over 4 years... divided by 4 year, it's still healthy ~5% annually (tax free, although unfortunately I don't qualify for student loan interest deductions due to income).  Is this a reasonable way to evaluate the prepayment? 

I am currently maxing out tax-advantaged retirement accounts (401(k) at $18k, my own Roth IRA at $5.5k and wife's Traditional IRA at $5.5k. I missed the boat on HSA during open enrollment last year, so I plan to do that next year for another $6k. Total tax-advantage savings then amounts to ~$35k per year).  If the choice between student loan prepayment or taxable investment is fairly equal, the psychological benefit of being debt-free in 4 years tips the scales.   

Bump for this -- is this a reasonable way to consider the "ROI" for prepayments?

You're over complicating it. It's as easy as comparing the loan interest rate to your expected market returns. Most people "expect" a market return of between 5% and 7%. Put your money in the place with the higher percentage rate.

[zombiehunter]

That's a good point.  I could make min. payments (~$1400 per month) and pay it off in 5 years @ 1.95%.  The extra $400 per month in additional payment, over 4 years, as you point out, totals $19,200.  For that, I get a rebate of $1,600, and save about $2,300 in interest (not that much in prepayment savings because the interest rate is so low).  So I think of it as a return of $3,900 on $19,200, or essentially an ROI of ~20% over 4 years... divided by 4 year, it's still healthy ~5% annually (tax free, although unfortunately I don't qualify for student loan interest deductions due to income).  Is this a reasonable way to evaluate the prepayment? 

I am currently maxing out tax-advantaged retirement accounts (401(k) at $18k, my own Roth IRA at $5.5k and wife's Traditional IRA at $5.5k. I missed the boat on HSA during open enrollment last year, so I plan to do that next year for another $6k. Total tax-advantage savings then amounts to ~$35k per year).  If the choice between student loan prepayment or taxable investment is fairly equal, the psychological benefit of being debt-free in 4 years tips the scales.   

Bump for this -- is this a reasonable way to consider the "ROI" for prepayments?

You're over complicating it. It's as easy as comparing the loan interest rate to your expected market returns. Most people "expect" a market return of between 5% and 7%. Put your money in the place with the higher percentage rate.

But simply comparing the interest rate (1.95%) doesn't account for the 2% of principal rebate when prepaying in 4 years, nor does it account for the interest saved by prepaying.  If, considering these factors, it's approx. equal to 5%, prepaying is worth it, no? But, without these factors, prepaying probably isn't worth doing at 1.95%, no?

[tonysemail]

why not defer the decision?
make a lump sum payment at the end of 4 years if the 2% rebate still seems worthwhile.

[MustachianAccountant]

That's a good point.  I could make min. payments (~$1400 per month) and pay it off in 5 years @ 1.95%.  The extra $400 per month in additional payment, over 4 years, as you point out, totals $19,200.  For that, I get a rebate of $1,600, and save about $2,300 in interest (not that much in prepayment savings because the interest rate is so low).  So I think of it as a return of $3,900 on $19,200, or essentially an ROI of ~20% over 4 years... divided by 4 year, it's still healthy ~5% annually (tax free, although unfortunately I don't qualify for student loan interest deductions due to income).  Is this a reasonable way to evaluate the prepayment? 

I am currently maxing out tax-advantaged retirement accounts (401(k) at $18k, my own Roth IRA at $5.5k and wife's Traditional IRA at $5.5k. I missed the boat on HSA during open enrollment last year, so I plan to do that next year for another $6k. Total tax-advantage savings then amounts to ~$35k per year).  If the choice between student loan prepayment or taxable investment is fairly equal, the psychological benefit of being debt-free in 4 years tips the scales.   

Bump for this -- is this a reasonable way to consider the "ROI" for prepayments?

You're over complicating it. It's as easy as comparing the loan interest rate to your expected market returns. Most people "expect" a market return of between 5% and 7%. Put your money in the place with the higher percentage rate.

But simply comparing the interest rate (1.95%) doesn't account for the 2% of principal rebate when prepaying in 4 years, nor does it account for the interest saved by prepaying.  If, considering these factors, it's approx. equal to 5%, prepaying is worth it, no? But, without these factors, prepaying probably isn't worth doing at 1.95%, no?

To see which is better, I'd suggest making a spreadsheet that compares, month by month, prepayment vs. minimum payment + putting the difference into an index fund with an assumed return of 5-7%.
Most people get the math once they've done this.

(You do need to factor in the prepayment bonus, that's an odd feature, but the "interest saved by prepaying" is a red herring - it's already taken into account when you simply compare the interest rates of the two options.)

[tonysemail]

thanks for posting this OP! 
I mentioned this to a friend and they were super enthusiastic about refinancing :)

In the FAQ section, it mentions more fine print like you have to direct deposit your paycheck with them and use their billpay service.

my friend's refinance went through last week.
they are very happy.
thanks again for posting this!

[Vinter]

A good choice to find information quickly

[OlyFish]

I am bummed; they don't serve my area of the country (although they serve the major cities an hour north or two hours south of me!)