Refinancing Student Loans

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?

• Can you borrow slightly less, pay off the \$9,000 @ 6.55% with the new loan, but keep the other two components of loan 4? – Peter K. Jun 13 '17 at 15:05
• Is it all or nothing? Can't you just exclude Loan 4 from the refi? – Hart CO Jun 13 '17 at 15:06
• I could exclude loan 4 from the refi, but then I have two loan payments a month, which I'm assuming will exceed my budget. – Kyle Jun 13 '17 at 15:12
• When you make payments to your current loans, are you able to designate which loans the payments go to? For example, could you pay off just the higher rate part (9K) of loan 4? – TTT Jun 13 '17 at 15:16
• Why would two loan payments be more than one larger payment? What's the term left on the existing loans? I'd expect to be able to apply payments in loan 4 to the 6.55% and keep the 3.15% and 4.25% loans(I did something similar with my refi a couple years back). – PGnome Jun 13 '17 at 15:23

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.

• One thing that's kind of cool is in this case the debt snowball would have the loans paid off in numerical order (loan 1, then loan 2, etc) which also happens to be the least expensive order mathematically. – TTT Jun 13 '17 at 15:25
• Unfortunately, at this point, I'm making the minimum payment on all of the loans, so I'm not sure the debt snowball method applies here. Not saying I can't pay more towards the smaller loans, I just don't currently and I wouldn't be able to pay much more than an additional \$50/mo. The reason I thought a refinance would be a good idea is that my monthly payments are increasing to \$565/mo next month, which is the same amount I'd pay with a refi, but a lower interest rate albeit not much lower. – Kyle Jun 13 '17 at 15:35
• Can you work a second job or overtime? I would and did when I finally got serious about cleaning up my financial life. – Pete B. Jun 13 '17 at 16:16
• I've decided to forego refinancing at this point. I want to buy a house in the next 12-24 months, and already have two hard inquiries on my credit report, so I don't think it would be worth another hard inquiry. Additionally, I'm going to begin paying more towards the smaller loans to get them eliminated more quickly. Marking this as accepted. – Kyle Jun 16 '17 at 14:31
• @PeteB, I wasn't very clear when I said I couldn't pay more on the loans. What I was trying to say is that I wanted to keep the monthly payments around the same amount because I know what my recurring bills are and I budget the rest of my finances around that. But I've taken the advice and I'll be putting more towards the loans and will cut back on spending. – Kyle Jun 16 '17 at 17:31

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. )

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.

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.