Pay the government as little as possible by refinancing your student loans

This article references refinancing options available by the following lenders: SoFi, Commonbond, Earnest and Laurel Road. There are no referral links in this article or any of my articles for that matter. So feel free to read it knowing I have nothing to sell you!

Refinancing your student loans is the act of another lender or bank taking ownership of your existing student loans. Technically the new lender pay off the old lender’s balance in full, issues a new loan to you (the borrower) at a lower interest rate. You then remit payments to the new lender until the student loan balance is paid in full. The primary reason people do this is to save money on their interest rate. A lower interest rate means a lower monthly payment, which means more cash flow to the borrower. This idea kind of makes sense if you’re planning on grinding out a student loan repayment plan in excess of 5, 10 or 15 years. I really didn’t think refinancing my student loans, currently at $145,000 (see pic below) would be applicable for me since my target payoff date is < 12 months.

Infact if we look at my anticipated payoff table outlined below, I actually have 8 months left to pay off around $145,000. To hit this mark i’ll have to make minimum monthly payments which range anywhere from $13,000 to over $32,000. It’s a stretch goal I set for myself but since I work in a production (aka sales) based role, anything is possible.

If we assume that I’ll have this mountain of $145,000 paid off in 8 months, we can calculate the total amount of interest I’ll need to pay below. We can see that I’ll owe the US Department of Education around $6,084 of interest between now and the end of the year.

Total amount of interest = (Blended interest rate/ 365) * (# of days in 8 months )  * outstanding loan balance
Total amount of interest = (.0632/365)*(241)*145813.80

The thought of giving ANY money to the US government makes me cringe. So I thought to myself, is there any way I can limit the amount of cash I pay to these incompetent bureaucrats while continuing to meet my debt obligations? The answer is yes. There are many commercial lenders which offer the opportunity to pay a lower interest rate than what’s available via the US Department of Education and it’s current subsidized/unsubsidized loan programs, which charge SEVEN PERCENT! Yikes! Here i’ve compared student loan refinancing options from 4 major lenders:

1. SoFi: 4.324%
2. Earnest: 3.790%
3. Commonboard: 3.890%
4. Laurel Road: 4.250%

So we can see that Earnest offered me the lowest rate. 3.790% to consolidate $145,000 with a blended rate of 6.32%. They also sent me this funny email letting me know I was in the ‘top 3% of applicants’. Like, ok? Why am I not in the top one percent!?

The question remains, is this refinancing activity actually going to save me any MONEY?! I ran the cost projections for each of the 4 lenders, with a 12 month and 8-month repayment window and here are the summary results.

Column 1 is the lender, column 2 is estimated interest paid at 12 months, column 3 is estimated interest paid at 8 months, and column 4 is amount saved in 12 months by refinancing to another lender. The net result is that I can save around $3,822 by refinancing to Earnest. Which is slightly north of $300/month. Certainly compelling. The details to derive the summary table above can be found below. If you’re thinking about refinancing your student loans, it is definitely a worthwhile activity to perform this exercise on your own so you can actually quantify your projected savings.

So will I refinance with Earnest? Maybe. I’m going to sleep on it for the next 48 hours and see how I feel on monday. In spite of the data-driven analysis we just performed, there’s certain qualitative risks that are hard to measure in this scenario. For example, if you and I refi to any of these lenders, we lose certain ‘perks’ of the existing US Department of Education’s loan program such as income-based repayment. If you plan on taking 10 or 15 years to pay off your student loans, this is something you should consider. But then again, you shouldn’t take 10 years, 5 years, or even 3 years to pay off your student loans. They’re handcuffs of the middle class which will prevent you from achieving economic wealth creation.

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