Privately Refinancing Federally Consolidated Student Loans?

December 2, 2016 10:51 AM

I have been hearing a lot lately about people refinancing student loans with private companies like SoFi or DRB; do you have any personal experience doing this, and did it successfully save you money?

My situation--
-I have close to 50K in student loan debt
-It is federally consolidated at an interest rate of 7%
-I will eventually qualify for Public Service Loan Forgiveness after 9 more years of payments*
-My payments are currently very affordable and could double and I'd be fine, although I'd have to budget more carefully than I do now
-I have no idea if I will have already paid off the loan in 9 years due to increase in income/payments (Income-Based Repayment plan)

In theory I would like to lower my interest rate and be able to just pay this off, but I keep getting caught up in "but what if PSLF saves me money in the long run" which I don't think is calculate-able at this moment. There are benefits to having the loans where they are now, namely the possibility of forbearance and PSLF itself, but I hate having it hanging over my head, I hate not even touching the principle, and I hate feeling like any increase in salary (or getting married and having them base repayment on combined income) is going to make PSLF not worth it. What would you do?

*Also if you have any tips for how to get them to reconsider counting the 8 years of payment you already made that don't count since they weren't on the right repayment plan, I am ALL EARS.

posted by stellaluna to Work & Money (12 answers total)

If you're aiming for PSLF, you should probably stick with your federal loan package. The combination of IBR and PSLF factored out to be a much more manageable long-term solution than refinancing via a private company, in my situation. If you pay things off before PSLF kicks in, hooray for you. You're not shorting yourself anything by staying in the program and paying more than your income-based minimum monthly payment if you can do so.

I started with about $100K in grad school debt, about half private and half federal; I've almost paid off the private, and am paying a modest amount on federal aiming at the loan forgiveness goal; this allows me to channel a potion of my income into savings, which is more important the older I get, and still pay more than my minimum IBR amount most months. I've been very grateful for IBR on two occasions when I needed to pay for expensive medical stuff. In those instances, I pay my minimum IBR amount for a few months and channel the rest into keeping other urgent expenses from becoming more complicated. You won't have that luxury after refinancing with a private company (that's a gross generalization, but it was very true when I last looked at refinancing).

For people with lots of savings and personal support outside of their own income, my response doesn't apply. If you can direct more income to paying off your student loans by leaning on financial support from savings, etc., by all means do so.
posted by late afternoon dreaming hotel at 11:08 AM on December 2, 2016

You're not shorting yourself anything by staying in the program and paying more than your income-based minimum monthly payment if you can do so.

Yes, you are. Do not pay extra money against a debt that will be forgiven in 9 more years. If you have any additional income left over, it should go into a Vanguard or Vanguard-like retirement fund.

I hate having it hanging over my head, I hate not even touching the principle

You are going to hate it a lot less in 9 years, and hate it even less than that when you retire if, at the point the loan is paid off, you immediately start sending the same amount as your loan repayments into retirement savings. Future you will thank you.

Loan forgiveness is a boon you are fortunate to have; do not undervalue it. Many, many of your peers are crippled by loan repayments with literally no end in sight. Look at the big financial picture, not the loan principle.
posted by DarlingBri at 11:40 AM on December 2, 2016 [2 favorites]

Best answer: Giving up IBR is risky, very risky. If you lose your job for whatever reason, the private loan people have no incentive or desire to work with you, except in ways that make matters worse in the long run.

However, barring a drastic event, whether you'd do better refinancing is actually pretty calculable. Make a spreadsheet and run several scenarios in which your income stays the same, increases 2% a year, increases 5%...whatever seems like a possible outcome in your current job. The IBR payments are calculated by a publicly-available formula, so that's easy to do. Then take whatever interest rate SoFi or whoever is offering you and calculate your payments based on that. Your payments in the IBR cases cut off in nine years. SoFi will probably offer you a twenty-year term (though not for sure), so run that one out to twenty years. Obviously, you can't predict the future, but you can get a good idea of what scenarios would favor SoFi, etc. or which would favor staying in the PSLF.
posted by praemunire at 11:44 AM on December 2, 2016 [4 favorites]

You definitely don't qualify for PSLF if your loans are privately held, but if you are able to then consolidate them into a Direct Loan they would be again. I am not sure if you can do that.

Private loan consolidation companies also may or may not offer forbearance/IBR if you lose your job or go back to school. One of the benefits of federally-held debt is that the IBR rules can kick in if you need them, so read the fine print. I used to work for minimum wage and IBR was a huge help; I don't think I'll go back to minimum wage, but I don't think I can rule it out.

I would personally stick with PSLF/IBR for now, since you can always refinance later in life, but you might not be able to get back the PSLF and nine years is not that long. I would honestly sit down and figure out the math of how much you'd wind up paying before it's forgiven versus how much you'd pay if it were refinanced. I have north of $70k with the interest (I forget the interest rate, but it's a little lower than 7%), and it works out that I'd be paying between 30 and 40% of the loan over ten years before it gets paid off, assuming I'm making what I'm making now, and that's worth it to me.
posted by blnkfrnk at 11:44 AM on December 2, 2016

Oh, and I agree with the above statement: if you are anticipating forgiveness, and you have extra money to put towards your loans, don't. Save it. If you're concerned that you might end up quitting your public-service job, you can put it in a low-yield savings account or something, but at least you'll have it. You can't "reborrow" your student loan if you run into a financial emergency.
posted by praemunire at 11:46 AM on December 2, 2016 [1 favorite]

You definitely don't qualify for PSLF if your loans are privately held, but if you are able to then consolidate them into a Direct Loan they would be again. I am not sure if you can do that.

You can't.
posted by praemunire at 11:46 AM on December 2, 2016

You should find out what interest rate SoFi and the other companies will offer you.

I'm saving a bunch of money in interest every month after refinancing, BUT, I'm not planning on getting loan forgiveness -- which would be a big thing to lose.
posted by J. Wilson at 12:55 PM on December 2, 2016

One other potential wrinkle to consider: PSLF might not survive Republican budget-cutting. Keep that in mind as you think about various options.
posted by acridrabbit at 1:15 PM on December 2, 2016 [3 favorites]

I refinanced with SoFi, but I wasn't heading toward loan forgiveness. It was an easy process and now I'm on a 10-year plan at 5.35% when my loans were all over 6% previously. I'm a year and a half in and there's been no problems. This has saved me money as I was on a plan paying a little less each month, but I think I was on a 25 year plan. This only raised my payment by a small amount and I'll be done 15 years sooner.
posted by jdl at 2:00 PM on December 2, 2016

Private loan consolidation companies also may or may not offer forbearance/IBR if you lose your job or go back to school.

Private loan companies wlll not offer you anything that won't drastically increase your principal, and even then only for a limited time.

$50,000 at 4.5% on a 10 year loan is $518 per month. As a single or married filing separately borrower, you'd have to make over $60,000 per year to pay more than that on IBR, or over $80,000 per year on PAYE. If you lose your job with Federal loans, your payment is zero. If you take a pay cut, your payment drops. Note: Don't sign up for REPAYE. It includes an income driven repayment marriage penalty, where your spouse's income is counted against you.

Barring drastic changes in the student loan program, or your ability to pay the whole loan in a few years, I would advise against Private refinancing. The Federal government is much, much easier to work with.
posted by cnc at 3:00 PM on December 2, 2016 [1 favorite]

PSLF might not survive Republican budget-cutting. Keep that in mind as you think about various options.

I think the general, but not universal, consensus is that Feds wouldn't be able to take PSLF away from people already in the program. There will absolutely be caps on the PSLF forgiveness amount for future borrowers, if the program survives at all on an ongoing basis.
posted by cnc at 3:02 PM on December 2, 2016 [2 favorites]

Have you talked to the PSLF people on the phone? If you've been working in private service and paying on your loans, it is pretty likely that you'd qualify, unless you were on a really funky repayment plan. I've found the people on the phone to be really useful.

If you haven't already, be sure to submit all the PSLF paperwork for all the months that you've worked in public service. Warning - the form is a little confusing - but at least you'll find out exactly how many months you've paid in.

Also be sure to do the IBR calculators regularly. They introduced a new IBR recently and the monthly payment may be lower for you. Some of the IBRs consider the spouse's income and some do not, so you'll want to look into that.
posted by k8t at 5:01 PM on December 2, 2016 [1 favorite]