Woo-hoo! I just finally made the last payment on my $30,000 of student debt! I can’t believe it!
I’m definitely excited, but it wasn’t easy getting here.
Some of those loans were nearly 8 years old, which means I’ve been scraping together payments for nearly 100 months in a row. Plus, keeping track of all the different interest rates, payment dates, terms and other details was almost as big of a challenge as paying the loans themselves.
I know a lot of you are in the boat which is why I wanted to share a cool, little trick for paying your loans off faster…
For example, when I entered my $30,000 debt into Darien Rowayton Bank’s (DRB) Payment Calculator, the results were crazy. If I’d had access to current rates, I could have saved thousands of dollars on interest and had one simple payment. And they would even have refinanced my Plus loans (the ones in my parents’ names).
Could refinancing your student loans make it easier to pay off your debt and help you save money? Here’s how to crunch the numbers and find out.
Is Refinancing a Good Idea for Your Loans?
In DRB’s example, a borrower wants to refinance 10-year, $100,000 student loan. The borrower can save $13,600 by refinancing that balance and knocking down the interest rate from 7.25% to 5%. Of course, your debt level and current interest rates might be higher or lower, so you’ll want to crunch your own numbers with the Payment Calculator.
Enter your loan balance and select a repayment term — it’s that simple. The resulting chart shows the monthly payment for four different interest rates, two for variable rate plans and two fixed rates. These are only example rates, though; your rate may be higher or lower depending on your credit score and other factors.
Unfortunately the tool doesn’t directly show how much money you save. You’ll see if your new payment could be lower than your current one, but if you chose a longer term, you might pay more overall because you’ll pay interest for a longer period of time. Here’s how to figure how much money you could save:
- Multiply your current monthly payment by the number of months left on the loan.
- Choose a DRB plan and multiply the monthly payment shown by the number of months in the repayment term.
- Subtract the second result from the first to see how much you’ll save. (A negative number means it would cost you more to refinance.)
For example, suppose you have a balance of $85,000, an interest rate of 6.25%, monthly payments of $911.50, and 128 months left to pay. You want to refinance with a 10-year term, and you qualify for an interest rate of 4.5%. Here’s what the calculations look like:
- Multiply your current payment ($911.50) by 128: $116,672.
- The DRB payment calculator shows that $85,000 at a 4.5% fixed rate, with a 10-year term, results in a payment of $880.93. Multiply that by 120 months: $105,712.
- Subtract the second figure from the first. Your total savings: $10,960
Check several plans to see which would work best for your circumstances. For example, if you expect to pay off the loan ahead of schedule, you could risk a variable-rate loan. You’ll get a lower interest rate (as low as 1.92%, when I checked), and even if it adjusts upward in the next year or two, the average rate for the few years you have the debt is likely to be lower than the available fixed rates.
Should You Refinance Your Student Loans?
You should refinance if it saves you money and if not, don’t, right? Well, maybe, but it isn’t that simple.
In the example above, choosing a 15-year term at 5% would get the payment down to $672.17. However, your total payments would be $120,991, meaning you would pay $4,319 more, despite the lower payment and lower interest rate. Depending on your financial situation, you might really want that lower monthly payment, so it might be worth spending a bit more in the long run. You’ll have to consider what’s most important to you.
You might also want to replace an unpredictable variable rate with a fixed rate, even if you risk paying more interest on the loan.
If you’re considering refinancing federal loans, DRB warns that you may give up your opportunities for deferment (the chance to stop payments and interest for a period of time) or forbearance (the option to skip payments while interest still accumulates). Other benefits you lose when refinancing federal loans include:
- Term extensions that are possible with some federal loans
- Income-based repayment options that can lower your payments
- Loan forgiveness programs for borrowers who go into public service
- Federal student loan consolidation plans
Find out more on the Federal Student Aid website.
Consider whether you’re likely to qualify for or use any of those benefits, and what their potential value is to you. Then you can make a more rational decision about whether to refinance your student loans. It may not be an all-or-nothing decision; it might make sense to keep one loan and refinance another.
Benefits of Refinancing with DRB
Though it takes a bit of number-crunching to see how much money you could save by refinancing, you might save even more than the $13,600 example on DRB’s homepage, especially if you’re paying off more than just a college degree. The average dental student debt is $241,000 upon graduation, and interest rates on older federal loans can be as high as 8.5% (if disbursed prior to July 2006). Knock a few points off that interest rate on a balance that big, and you would save a fortune.
Here are some of the advantages of the bank’s refinancing plans:
- Fixed and variable rates (as low as 1.92% variable or 3.5% fixed)
- No origination fees
- No prepayment penalties
- Will refinance many private loans
- Will refinance all federal loans
- Will refinance student loans and Plus loans made to parents
- Will consolidate private and federal loans
- Rate reduction for auto-pay lowers your interest rate by 0.25% if you use a DRB checking acount (look for the no-fee options)
Is There a Catch?
While DRB’s refinancing options will save many people money, they won’t work for everyone. Here are a few potential issues to consider.
- DRB won’t loan less than $5,000, so if you’re almost done paying off your loans, you won’t be able to refinance the remainder
- No loan payment deferral options, though they did just introduce forbearance options for short-term financial hardships (and in event that you die or are permanently disabled, they’ll discharge you loan)
- No payment reduction options
- Late payment fee of up to $28 (extra incentive to make sure you never make a late payment!)
One More Trick…
Make sure to run your numbers through their Payment Calculator to start answering that question. Look at how much money you could save over the life of your loan, and consider the factors that are most important to you.
If you decide to refinance, try this trick before applying: If you leave the page a few times after using the Payment Calculator, you might get the same pop-up offer I saw while I was testing it out:
Wait! Completing your application takes just a minute. Lower your student rates, and receive a $50 bonus when your loan closes!
Of course, you’re looking to save hundreds or thousands of dollars, but it’s always nice to make an extra $50 while you’re at it, right?
Your Turn: Have you ever looked into refinancing your student loans? Did you save any money?