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Gail MarksJarvis: What you need to know about refinancing student loans

McClatchy-Tribune Information Services

June 22, 2015


Each year I get about 1,000 questions on financial matters and thought it would be a good idea to share some of them with my answers from time to time in this column. I will pick the ones that I think apply to the greatest number of readers or are particularly interesting. Please send me questions, but understand that I cannot respond or answer all of them.

Q: Two years ago I finished my MBA and must pay back $150,000 in student loans. I have a good management job and can make the payments. But theyíre huge. I feel pressured from them and think about what would happen in a recession or if I wanted to take a position with a lower salary. Iíve received solicitations on refinancing student loans. Should I consider refinancing? All my loans are federal student loans, mostly Graduate Plus at 7.65 percent.

A: You might be able to reduce the interest rate by refinancing, but thereís a tradeoff that could provide even more pressure on you. Your loans are federal student loans, which is important for peace of mind. If you lose your job, or have an accident and become disabled, or have to take a job that pays you too little to cover payments, the government will provide relief. Depending on your ability to pay, you could escape payments for a while, reduce your payments temporarily, or even have a portion of the loan forgiven if you end up in certain public service or teaching jobs or havenít been able to pay the loans off entirely after many years. See https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation

If you refinance, you will no longer have federal loans but a new loan from a private lender, and banks and other private lenders donít give relief in tough times. They may offer some inducements to work with them, but private lenders typically are far less benevolent than the government.

That said, the federal governmentís graduate student loan rates probably seem exceptionally cruel at a time when home loans have been around 4 percent.

Student loan rates are higher because the lender "canít confiscate your education after the fact," said Mark Kantrowitz, senior vice president and publisher of Edvisors.

Still, if you have a well-paying job and outstanding credit, you may be able to lower your interest rate significantly through lenders like SoFi or Citizens Bank, said Kantrowitz. SoFi, for example, says it offers 10-year fixed rates ranging from 4.6 to 6.5 percent on student loans. But the best rates are reserved for people with extraordinary credit scores.

You might find lower rates on variable-rate loans, but be careful. Although the beginning interest rate on a variable loan might look enticing, it wonít necessarily stay that way. As the economy improves, the Federal Reserve will raise interest rates, and banks and other lenders will do the same on interest rates. Interest rates on variable-rate loans can jump several times over the years. In a 10-year period, interest rates go up several times, which is why Kantrowitz cautions: "Make sure you get a fixed-rate loan."

To see what refinancing might do for you, compare your existing loan to a new one using a student loan payment calculator like https://www.edvisors.com/loan-payment-calculator/. Notice what a change in interest rate does to your monthly payments. But also notice the total interest youíd pay over the length of the loan. It could be thousands more than you realize.

For example, if you have eight years left to pay off your $150,000 student loans at a rate of 7.65 percent, your monthly payment is about $2,094. If you can refinance and get a 5 percent interest rate for eight years, your monthly payments would drop to about $1,899. You could make the monthly payments more manageable if you refinance with a loan that will give you 10 years to pay, rather than your existing eight years. Then your monthly payments would be about $1,591.

But while taking a longer time to pay off your loan might make the monthly payments feel more manageable, you are going to have to pay the bank a lot more money overall. If you could get an eight-year loan at 5 percent interest, you will have to pay a total of $32,303 in interest. But if you want the lower payments spread out over 10 years, it will cost you $40,918 in interest. You must ask yourself if the breathing room you get on monthly expenses is worth paying an additional $8,600.

Still, either an eight-year or 10-year loan, with a 5 percent interest rate, would be better for you than the one you have now, assuming a 7.65 percent interest rate. With that rate, you are going to have to pay $51,016 in interest. So your $150,000 in student loans will actually cost you $201,016. Thatís massive, of course, but perhaps comforting to know Uncle Sam will give you a break if you need it.