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My wife and I have a large sum of student loans (>150k together). She is now out of school and I'm in the latter years of a PhD program. So we both have steady incomes. My loans are from the government and my wife's are half-government/half-private.

We are considering taking out a private loan to pay off the entire sum of student loans (or at least a large-majority sum). I have great credit and I expect I can get an interest rate well below 5% (probably ~3.x%). The student loans have various interest rates well above 5%. With a quick back-of-envelope calculation it looks like we would save about 10 or 15 thousand dollars over the life of the private loan compared to the life of the student loans.

I'm trying to think about upsides and downsides to taking out the private loan. I've found surprisingly little about this on the web. Maybe most young students don't have good credit so this isn't an option.

Pros

  1. Save 10-15k over the next 15 years (due to lower interest rate)

Cons

  1. Private loans will be less flexible if we cannot make payments for some reason.
  2. Won't be able to continue deducting student loan interest payments. (I don't see this as a huge benefit since a couple thousand dollars in annual deductions doesn't seem compare at all the saving $15k.)

I appreciate any other additional pros/cons or overall advice.

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    do you have an actual offer for up to 150K in loans at ~3% or it is just a guess? – mhoran_psprep May 5 '14 at 9:56
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    Pro: The private loans are bankrupt-able. Student loans are not. – Pete B. May 5 '14 at 12:24
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    +1 @PeteBelford Hopefully, it doesn't come to that. But useful to know. – Dr. Beeblebrox May 5 '14 at 13:36
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    I would actually start the conversation with a bank/lender. Loans without collateral are not so cheap, nor as easy to come by. My 15 yr term mortgage is 3.5% and HELOC 2.5% (variable, of course) but both of these are nearly risk free to bank as total loans are less than 1/3 my home's value. Aside from that, if you can get a low rate, I'd go for it. – JoeTaxpayer May 5 '14 at 13:52
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    First step, I'd talk to a bank about what rates they give on a personal loan. I don't know just where you live or what bank you use, but I doubt you can get 3% on a personal loan. I was just looking for a small, short-term loan -- ca $6,000 for a year or two -- I have an above-average income and my credit score is about 800, and they offered me 11%. Mortgages these days are running circa 4%, and from the bank's point of view that's the safest loan out there: they get a bunch of money up front in closing costs, plus if you default they have a lien on the house. ... – Jay May 5 '14 at 13:55
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I did a quick check at USAA that shows 7-year personal loans at around 8.5%. Their rates (if you are a member) tend to be competitive. I don't think government subsidized student loans are that high. Perhaps the private student loans are higher than that, in which case refinancing them would not necessarily be a terrible idea.

For Federal student loans, in addition to income-based repayment plans, you may be able to get the loan forgiven if you teach or go into public service or non-profit work for a sufficient length of time. If you're getting a PhD in order to work in academia, this may be a better bet.

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First, keep in mind that this whole things smells suspicious to me. I've never heard of anyone being able to borrow enough cash to pay off their student loans (especially 150k worth) but who knows. Usually banks won't even lend that kind of money for a secured obligation without making you go through a million hoops but what do I know. Is this an HLOC or maybe a student loan consolidation?

Several options come to mind:

  • if someone really is willing to let you borrow 150k in cash while you're sitting on top of 150k in student loan debt... why not use that money to pay off your student loans and then declare bankruptcy to wipe out that debt? Talk to a bankruptcy attorney before you do this, there are pitfalls. Also, make sure you are actually going to end up with loans that are not student loans at the end of this, or they will not be discharged in BK. If you're just consolidating you'll end up with a student loan to replace your previous student loan.

  • each of you go into teaching or some other public service job and after 10 years of payments, everything remaining gets forgiven. I don't believe the public service forgiveness event is currently taxable income. If the best job you can get happens to be public service, this is probably a great path to take. I think you can combine this with IBR as well and have quite a comfortable life while you're repaying.

  • if you have significant income, low living expenses and the interest rates aren't too high, it might be quicker to just pay it off in a few years.

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