student loan plan

The Student Loan Plan: Dave and his Refinancing Options

Michael Lux Blog, Consolidation, Lower Payments, Student Loan Plan, Student Loans 0 Comments

In this edition of the Student Loan Plan, we will take a look at Dave who is trying to figure out ways to lower his high interest federal student loans.  If you want tips for dealing with your student loans, contact us.

Dave writes:


I am completely stumped on whether I should or even can consolidate my student loans and if I could even possibly get a lower rate. I have great credit score of 810 and make $95,000/yr. Any light you can shed on possible paths forward are much appreciated. My outstanding loans are as follows:

Undergrad: Consolidated Navient loan
Balance $20,019
Rate: 3.5%
Monthly Payment 192.53
10 yrs remaining

Grad school: Stafford Loan (Great Lakes)
Balance 41,847
Rate: 6.8%
Monthly pmt 306.74

Grad school: Grad Plus Loan (Great Lakes)
Balance 14,739
Rate: 7.9%
Monthly pmt 123.75

Thank you,


There are a couple paths that are worth considering…

Stick with the Federal Loans

Based on the description here, it appears that all of Dave’s loans are federal student loans.  (Note: to confirm whether or not your loans are federal, check out the National Student Loan Database, maintained by the Department of Education).

The major advantage to having federal student loans is that you have the ability to sign up for income driven plans such as IBR, PAYE, or the newly created REPAYE.  Even if you are not using these plans now, having them available is a huge perk.  With private student loans, a job loss could put you into default.  With federal student loans, a job loss just means that your monthly payment becomes $0 per month.  This unemployment protection is huge.  Similarly, federal loans also have programs like Public Service Student Loan Forgiveness.  Even if you are not currently working in a public service job, if the possibility exists in the near future, it might be good to stay federal.

However, if you don’t think you will be taking advantage of these federal programs, then the 7.9% interest is a really high interest rate to live with.

Take your business to the private market

With Dave’s great income and credit score, he should be able to leverage this strong position into lower interest rates.  Many lenders are now offering refinancing services for people in Dave’s position.  The way it works is pretty simple.  They pay off Dave’s high interest loans, and he starts making payments on a new loan at a lower interest rate.

In many ways, Dave represents the ideal customer to these lenders.  Because of his credit score an income, he is very likely to repay the debt.  With the Department of Education treating everyone as equal, Dave is currently paying an interest rate that doesn’t actually reflect his creditworthiness or ability to pay.

The other advantage in Dave’s favor is that the student loan consolidation and refinancing marketplace is getting incredibly competitive.  Lenders like SoFi are offering rates below 2% and $150 to new customers.

Should Dave choose to consolidate, he may or may not want to include the low interest student loan that is currently at 3.5%.  Obviously if he can beat the 3.5% by a significant margin, it makes sense to consolidate all the loans together.  But if a lender offers something in the range of 4 to 5%, it is important to remember that refinancing is not an all or nothing decision.  Dave could keep is existing low interest loan with Navient, but refinance his high interest loans with Great Lakes.

Final thought

Getting a lower interest rate or getting signed up for the right federal repayment plan is clearly a big step forward.  However, it is important to remember that it is only a single step.  Being disciplined financially is critical.  Just because you have a monthly bill of $123.75 doesn’t mean that is what you should pay.  With a high interest rate loan, paying everything you can spare each month to attack the debt is essential.  Those extra payments eliminate debt sooner, and save a fortune in interest over the life of the loan.