October 4, 2017
hi i’ve found your blog to be extremely helpful over the years. it has given me a much better understanding of how to handle my overwhelming student loan situation, thank you and i was hoping you could help me out with a question?
i have a student loan of about $84,000, interest rate is 5.79%, 7 year term, monthly payment is about $1000, and i pay an extra $1000 each month when the payment is due.
would it be more efficient to refinance my loan at a longer term, with a lower monthly payment, but higher interest rate (i.e. 20 years, $645 monthly payment, and 6.615% interest) or for a shorter term, with a higher monthly payment but lower interest rate (i.e. 7 years, $1200 monthly payment, and 3.85% interest rate)?
I can afford to pay $2000 a month and wondered if you could provide some insight?
thank you again for everything you’ve done in creating this wealth of information,
May 3, 2014
Thanks for the kind words. I’m thrilled to hear that we have been able to help you out over the years.
As far as your monthly payment question, it really comes down to personal preference. If you are confident that you will definitely be able to pay $2,000 per month, then a short term refinance makes a lot of sense. The lower the interest rate, the more efficient your monthly payments are.
Here is how things compare with your two options: With an 84k balance at an interest rate of 6.615% per month, you are paying about $463 per month in interest (though this number goes down with each payment you make). If you opt for the short term loan at 3.85%, you are paying about $269 per month in interest.
As you can see, the lower interest rate but higher payments will get your debt erased much quicker, and with much less spent on interest. The downside to this option is flexibility. If you need some extra cash one month, the loan with lower payments gives you the ability to divert your normal extra payment towards whatever emergency you are dealing with.
This is where personal preference comes into play. Some people would rather have that flexibility and are willing to spend more on interest to get it. Others will prefer the monthly savings on interest.
From the very specific rate details you are sharing it sounds like you recently shopped around refinance rates. If so, great move. If you can afford $2,000 per month, you might even want to look at a 5-year loan instead of a 7-year loan. If you haven’t shopped around yet, it might be worth your time to send out applications to 4 or 5 lenders. The initial process takes a few minutes per lender, but with your large loan balance, even a slight difference in interest rate can result in major savings for you. Our lender rankings page should help you find the best rates: https://studentloansherpa.com/student-loan-reviews/
Hopefully this all helps you weigh your options in your current situation.
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