Refinancing Student Loans

Question

I have 4 outstanding student loan accounts, all with the same lender, totaling approximately $40k. The interests rates vary from 3.15% to 6.55%.

Each account has one or more loans in it.

Loan 1:

• $5,200 @ 6.55% (unsubsidized)

Loan 2:

• $6,000 @ 6.55% (unsub)

Loan 3:

• $3,000 @ 5.35% (subsidized)
• $6,100 @ 6.55% (unsunb)

Loan 4:

• $5,500 @ 3.15% (sub)
• $4,000 @ 4.25% (sub)
• $9,000 @ 6.55% (unsub)

I'm pre-approved for a $40,000 refinance loan for 7 years at 5.24%, so it makes sense for all of the loans except Loan 4, which has sub-loans that have an APR less than the new rate.

I would like to consolidate all my student loans into one loan to take advantage of the lower APR (for the most of them), and also only have one payment per month.

Would it make sense to go ahead with the refinance, even though $9,500 will now be borrowed at a higher interest rate?

Answer 1

The weighted average of the interest charged to your loans comes to 5.73%, so mathematically the refi does work in your favor, but only slightly, about a half a percent.

Are there other factors in favor or detriment to refinance? Things like fees, or loan forgiveness? That would really tip in one favor or the other. For example, when I refi'd my student loans, the new company forgave the last $500. For me that made it a good deal.

Failing any incentives to refi, I would not do it. A half point of will not make a significant difference in comparison with your attitude and behavior towards this debt. I'd pay this off using the debt snowball method and shoot to have it all cleaned up in about 24 months.

Answer 2

Ok, so, you don't say how much time is left on the current loans, so I had to make some assumptions. The $297 current minimum payment for loan #4 suggests 6 years left, but that doesn't jive with the $565/mo payment for all the loans in aggregate (for which 7 years remaining is nearly identical to your numbers). I'll assume 7-years are left for now and update if needed. I'm also going to focus on only the minimum payments for all options. Additional payments will be a win regardless.

Option #1: Do nothing--

• Monthly Payment: $562.26
• Total Payments: $47,229
• Total Interest: $8,429

Option #2: Refi everything @5.24

• Monthly Payment: $552.78
• Total Payments: $46,434
• Total Interest: $7,634
• Savings: $795.85

Option #3: Refi loans 1-3 @4.99% and leave loan 4 as is

• Monthly Payment: $548.87
• Total Payments: $46,105
• Total Interest: $7,305
• Savings: $1,124.60

Option #4 (if possible): Refi loans 1-3, and subloan 4.c @5.24% and leave the 3.15% and 4.25% loans

• Monthly Payment: $545.62
• Total Payments: $45,832
• Total Interest: $7,032
• Savings: $1,397.61

So the refinance options will offer some improvement, though, as others have mentioned, it's fairly modest. Whether that's worth it is up to you. I lean towards the idea that every little bit helps, so personally I'd refinance. However, you should be aware that often times you lose some of the student loan protections provided by government loans (e.g. deferred repayment plans, loan forgiveness in certain occupations, etc. )

Answer 3

If it were me, I would do the consolidation simply because one payment every month is easier than managing 4 different payments that could likely change loan servicers periodically. The total difference in amount paid is likely to be small either way, but you'll have less things to think about with the consolidation.

The real way you're going to save money is by making bigger payments above and beyond the minimum payment whenever you can.

Update: Based on your comment that if you consolidate only Loans 1-3 the rate would be 4.99% (which is even lower), then a good alternative would be to consolidate just the first 3 loans and have two payments. Then when you have extra money available you would put it towards the 6.55% rate portion of Loan 4 until it's paid off (if you can), then once it's gone switch over to paying extra on the consolidated loan. You'll save a little bit more this way, but I'm not sure if even that extra savings is worth the additional complexity. That depends on your personality.

Answer 4

An alternative consideration.

If you do not consolidate, then any excess payments (if you can afford it), can be strategically targeted to the higher interest loans first.

You may also find it more rewarding when you pay off each individual loan. Think of it as a way to motivate yourself.

Finally, the monthly amount due, will reduce with each loan that is paid off.

When you consolidate you gain a favorable interest rate, but lose these advantages.