Student Loan Refinance – FIRE Edition

Our next foray into repaying our $107,000 of student loans was learning about student loan refinance and consolidation. I researched several options, including SoFi and Citizen’s Bank, where Mrs MF held a checking account. I submitted our request to refinance to both companies. We included myself as a co-borrower because I had better credit due to the age of credit history.

At the time, interest rates were at historic lows, but the US Federal reserve was rumbling about, and eventually did, raise its benchmark interest rate while we made this decision. Student Loan interest rates are tied to the LIBOR benchmark, which stands for London InterBank Offered Rate. I suspected interest rates would rise soon. (I wasn’t exactly right. Large market forces kept them low for nearly 12 more months).

Both Citizens and SoFi advertised variable rates on refinancing in the high 1% range.  These rates are evidently reserved for only the highest credit individuals. Even with our average credit score of nearly 785, we were only offered a 3.75% variable and 5.7% fixed rate for about $28,300.

The scariest part of the variable rate offer for me was the small print. These companies reserve the right to raise the rate up to 7.5% at the drop of a hat. We were more comfortable with less risk – and a slightly higher interest rate – due to our accelerated loan repayment plan. We decide to go with Citizens, which had a 0.4 percent better offer than SoFi.

How Student Loan Refinance Works

Beware: Refinancing your loans could reset the clock on a Public Service Forgiveness plan. If you plan on working for a Non-profit and having your loans forgiven this may not be the option for you. Read more here.

If you have a variety of student loans you know they are divided into Groups. When you apply to refinance you tell the bank which loan groups (we had 3 loans accounts, with about 4 individual groups each) you would like to refinance. The bank, after approval, issues a check which pays off your original loan issuer, and then opens an equal account for you, through their own loan service provider. (student loan servicing is incestuous at best, with a few major companies owning all the smaller entities).

So began our first lesson in the evils of the Student Loan Refinance industry.

One would expect that when refinancing a loan, one would be looking at a lesser interest rate than the current rate. You could find the weighted average of your loan’s rate like this: https://support.microsoft.com/en-us/kb/214049

If the interest rate the bank offers you is less than your existing weighted average (considering any loan origination fee, etc), then refinancing would make good financial sense.

As a natural progression to my rejection of the Debt Snowball, I had requested Citizens refinance the four loan elements with the highest interest rates: 6.7% to 5.6%. Based on my weighted average calculations with an excel spreadsheet, I expected that the higher interest loan rates would be reduced, with anything below 5.8% being a good deal.

Enter Rule #1: DO YOUR OWN MATH. 

Only you look out for you. Anyone who is making money off your business is not going to help you at their expense.

Instead of taking the loan elements which I had identified to be refinanced, Citizen’s had accessed our entire loan portfolio and, starting with the lowest interest rated loan, offered to refinance $28,000 of loans with a weighted average of about 4.5%, for an offered rate of 5.7%. This was not explicitly stated anywhere, but I read the entire document, and followed Rule #1.

 Citizen’s Bank nearly got us to give them a loan!!

It took about three weeks, and two more loan application submissions, before Citizen’s disregarded our low interest rate loans and agreed to refinance the higher rate loans. We also received 0.25% off for customer loyalty, and the offer of an additional 0.25% if we used auto pay.

In retrospect, we might have refinanced our loans with the largest 8% loan included, instead of paying it off in cash right away. Because the interest rate offer didn’t change when Citizen’s looked at our low rate groups or our high rate groups, I think Citizen’s still would have offered a rate of 5.4%, but for a larger note. While this would not have saved a significant amount of money, it would have reduced our short term risk due to the length of loan terms. Feeling the weight of an 8% rate, I rushed to pay that loan off in full, which for a short time depleted our savings. It was a risky move, but it worked out.

What is your Student Loan Refinance risk tolerance?

 

Disclaimer: I am not a licensed financial counselor of any sort. The opinions contained here are my own. Investing has implicit risk, past gains are no guarantee of future returns. You may lose money, including the principal.

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