Numerous large student loan balances: Pay down principal or refinance to 5-year loan

Question

My spouse and I have almost $150k in Federal student loans. About 60k of this balance is in consolidated loans, and the remaining 90k is split between roughly 20 smaller loan balances (the smallest is 1.5k, the largest non-consolidated loan is 15k). Due to an botched attempt to refinance via the IBNR program (and the subsequent underpayment of loans for a time), we ended up accumulating enough interest that we're essentially at 120 remaining payments (so the full 10 years), even after paying for 18 months.

We're taking steps to refinance a small portion at half the Federal interest rate via SoFi, which handles personal and student loans (we're taking the larger 7.62% loans and getting a 4.25% rate for a 5-year repayment plan).

My question is this:

Is it more financially savvy to refinance most/all of our high-interest loans to a 5-year/60-payment plan, or should we attempt to pay down the principal on the 10-year/120-payment plan?

Is there any benefit to the latter option? My initial assessment is that we're essentially cutting out 60 payments in exchange for a higher monthly payment. Would there be any potential gain to retaining the 10-year plan for our high-interest Federal loans?

Answer 1

The way to work out whether this is a good move or not is to add up the values of all future cash flows to pay down the loans and work out which is the largest.

I used this one - http://www.calculator.net/payment-calculator.html

It's nice and simple - your mileage may vary and I rounded heavily with the numbers so make sure you do them yourself before you make a move.

There are good tools that you can use to do this on the internet but in essence, you're going to pay out about $211k for the high-interest loans and you're going to pay out 166k if you do the whole lot over 5 years at the lower interest rate.

The maths say that the low interest rate option is the better one so it comes down to two factors - whether you can afford the $2800/month in payments and what that's going to do for your lifestyle. If you can afford it and can still live a life that you enjoy you'll come out nearly $50k in front over 10 years - which is a much better option. It all comes down to whether you can afford the extra $1100/month and still live the lifestyle you want - personally if it was me and I could afford it I'd refinance the whole lot at the low interest rate tomorrow. $50k is a GREAT home/investment deposit and if you get used to living without the $2800/month, the next 5 years of saving after you've paid off the shorter loan term would leave you with another $168k in the bank.

Just be a little bit careful choosing the higher repayment amount as the closer you get to the maximum amount of disposable income you have, the higher your risk level - you could lose a job or if you're on a commission you might go through a rough patch where you're not making as much money - and defaulting is no fun.

To sum up - High Interest over 10 years - $211k total repayments and $1750/month. Low interest over 5 years - $166k total repayments and $2800/month, keep saving at the same rate for the additional 5 years you'd be paying off the high interest loan and you'll end up with $168k in the bank + interest on it - nearly $220k in front - IF You can afford the higher payments.