Ever since I was a kid, I didn’t like owing people money or people owing me money.
I don’t even remember all the stories, but my family has always been quick to tell me about my early inclinations towards money management. I used to collect spare change, I would ask for a dime back if I loaned it to you, and I always had extra money saved to buy my own candy (who needs adults!).
I now have a very deep relationship with debt. I categorize all my debt as Good, Bad or OK and manage it accordingly. I keep a close eye on everyone I owe money to and how much I’m paying to borrow it. And I’m always looking for someone with a better offer.
There was only one time in my life when I had a lot of unsecured debt (i.e. no assets against the debt, like a car or house): after graduating from grad school.
I had always wanted to go to grad school after finishing undergrad. I got computer science and economics degrees from the University of Maryland (go Terps!) and managed to do it with $0 student debt. This was thanks to my loving parents and a four-year full scholarship (it took me five years to finish both degrees, so needed a little help). Besides showing me the power of generational wealth (my parents allowed me to be debt free), this left me debt free with a great paying job after school.
Fast forward and life as a consultant is wearing thin. I’m studying for the GMAT to get an MBA. After applications, tests and a lot of hustling, I decide to go to my dream school, the Massachusetts Institute of Technology (aka M.I.T.) Sloan School of Management. This time I get only a partial scholarship, nothing but a solid “congratulations” from my parents, a condo I’m renting out at a loss, and a woman I’m planning to marry. For the first time ever … I’m getting a student loan.
Grad school was great. Friends for life, life skills, powerful connections, and all the other good stuff. In addition to changing my life for the better, it left me with credit card and student loan debt.
In addition to all this debt, I did manage to marry the love of my life a month after graduation, move my new family to San Francisco from Washington, DC and land a job at a startup. With so much happening, we turned to a financial advisor from Learnvest to come up with a plan. Soon, I’m balling on a budget and paying off debt.
It’s 2014, and I’m two years into the plan. Yet, I’m holding $89,000 in debt (student loans and credit cards), with $76k of it in student loans. I feel good about my plan, but I had a “what the f*$&” moment and didn’t like the idea of paying so much interest on so much debt. Where to start?
The Basics Of Student Loans
First thing, let’s understand student debt and my options. We’ve gone deep on student debt before, so I’ll keep it brief this time.
There are only two important facts that matter when it comes to deciding whether to refinance or not: federal vs. private and the interest rate.
Federal Vs. Private Student Loans
One huge difference in student loans is whether you borrowed from the government (federal) or whether you borrowed from a bank (private). This will have a big impact on how you can refinance your student loans.
Federal loans usually have your best option, although that’s questionable now. Subsidized loans offer lower interest rates, better deferment and forbearance options to delay payments or interest and options for cancelling the entire debt. Overall, the gov’t is a lot more lenient with you.
Private loans, on the other hand, can vary significantly in their prices and repayment options. Typically, if you have good credit you can get very low-interest rates, but they can also be significantly higher than the fixed federal rates.
If you work in the public sector or don’t have a lot of income, the long-term payment options and flexibility that come with federal loans may be important. While you can consolidate your federal loans for simplicity, the better plan is to pay off the higher interest loans first and work your way down to save on interest.
If you are stable and have higher income and good credit, refinancing into a private loan may offer significant savings on interest rates at the cost of the flexibility you would not use.
Student Loan Interest Rate
The interest rate on the loan is how much you are paying to hold the debt. It’s a fee lenders take every month for you to have the privilege of borrowing their money.
Once you’ve determined whether or not you need the features of a federal loan, the next important thing is the interest rate. The higher the rate, the more expensive the debt. You want to reduce your overall interest rate.
What Did My Student Debt Look Like?
Similar to others with large amounts of student debt, I had several loans at several different rates and a mixture of private and public loans.
The weighted average interest rate of my debt was 6.14%, with the lowest at 5% and the highest at 6.8%. I wanted to see if I could get it reduced.
First, I considered the benefits of federal loans vs. private loans. At this time, I had avoided refinancing because I had gotten laid off from that startup and benefitted from temporary deferment. But, I had a new job at Facebook, making much more, and my side hustle, a blog about dating and relationships, was doing well. Now, I was all about lowering my interest rate.
How to Refinance Student Loans
I started by looking into federal loan consolidation, but since it wouldn’t reduce my overall interest rate, I wasn’t interested.
Then, I moved onto private student lenders. By 2014, this industry was thriving with FinTech companies offering very low rates using newer underwriting methods. I had my pick of several new and established companies willing to give me low-interest rates. Another thing that happened was private lenders offering more forbearance options and flexibility.
While looking into several different companies, I focused on:
- Lowest Interest Rate
- Basic Deferment and Forbearance Options
- Good Reviews
I narrowed it down to three companies, SoFI, Earnest, and Laurel Road (DRB at the time). I applied to all three and in the end, the interest rate was the determining factor.
I decided to get a variable rate, which was up to 2% lower than the fixed offerings, because I planned to pay off the debt soon. Everyone predicted a rise in interest rates, so I knew it would increase over time, but I planned to pay it off before it rose to the levels of the fixed rate.
At about 2.5%, SoFi won and I refinanced my remaining student loans with them. I’ve been happy with them so far. They have grown a lot as a company while providing new offerings. I haven’t actually called their customer support for anything, but they seem competent. For me, all I need to know is you honor your rate and come through with the benefits you promised.
So, What Happened?
Well, I’m happy to say I’m down to less than $10k of student debt. I have the cash to pay it off but because the rate is so low, I consider it OK debt and would rather invest the money.
How I paid off $70,000 in student loan debt is a long story for another time. It involves working, saving, a bunch of company stock and a lot of learning as I move along my wealth journey. Stay tuned.
Have you refinanced your student loans? Have a tip or trick for building wealth and minimizing the burden of student loans? Leave a comment and share with the community.
This article is part of the Student Loan Debt Movement, which is encouraging and inspiring people to take action on their student loans
Damien is a Personal Finance Nerd and former Facebook Product Manager who started Wealth Noir to help others find wealth. He actively invests in stocks, robo advisors, and cryptocurrency … but loves real estate investing. He holds an MBA from MIT and a Comp Sci & Econ degrees from Unv. of MD. He’s a proud dad, which is his biggest accomplishment.