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.
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.
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
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
said, the federal governmentís graduate student loan
rates probably seem exceptionally cruel at a time when
home loans have been around 4 percent.
loan rates are higher because the lender "canít
confiscate your education after the fact," said
Mark Kantrowitz, senior vice president and publisher of
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.
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
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.
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.
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.
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.