Refinance Strategy: High Interest Private Loans, Lots of Federal Debt

Michael Lux Blog, Refinance, Strategy, Student Loans 0 Comments

In this refinance case study we will look at Toby’s student loans.  Toby has a ton of federal student debt from his graduate school days and a smaller pile of private loans from his undergrad studies.  Complicating Toby’s situation is the fact that he is a government employee.  His income is lower than what it might be in the private sector, but he is working towards Public Service Loan forgiveness.  He doesn’t want to mess with his federal loans, but his goal is to lower the private loan interest rates that are as high as 9%.  If you would like to participate in a refinance case study, send us an email.

The Basics

  • Alias: Toby (these case studies are anonymous)
  • Salary: $50,000 per year
  • Credit Score: 730
  • Federal Debt: ~$200,000
  • Private Debt: Three loans totaling $15,000
  • Private Debt Interest Rate: 8% on average
  • Other Debt: $14,000 personal loan (No mortgage, car payment or credit card)

Refinance Options

Things for Toby will be tricky due to his large federal student loan balance.  This large balance could scare lenders off, but income-driven repayment plans mean his payments will always be manageable.  As a result, we should get a pretty good idea about the lenders that treat large federal debts most favorably when refinancing private loans.

The Strategy

Because Toby is somewhat of an outlier as far as his debt is concerned, it will be important to cast a wide net and apply to a number of student loan refinance companies.  We will work our way down the student loan refinance company rankings until it is clear that we have found the best rate available.  In less than an hour Toby was able to check rates with over 10 lenders, so shopping around is not a time consuming process.

Toby is saving for a deposit on a house, so his goal is to get the lowest payment possible.  That means a 20-year loan.  However, because interest rates are so low, Toby will be seeking a fixed-rate loan.

The Results

LenderDecisionRateNote 
SoFiApproved6.125%
LendKeyApproved7.17%LedKey did not have a 20-year loan option, approved rate is for a 15-year loan
ELFIApproved5.28-5.47%The loan was pre-approved, but rejected after submitting all documents
Laurel RoadApproved6.05%The loan was pre-approved, but rejected after submitting all documents
CommonBondDeniedNACosigner required due to total debt to income ratio
CredibleDeniedNADenials from Citizens, EDvestinU, Earnest, College Ave, mefa, and Connext

Picking A Lender

Toby’s application seemed to cause issues with the “pre-approval” process.  The large federal debt is likely the culprit.  Typically when an applicant is denied after a pre-approval it is due to an income documentation issue, but with Toby’s government job, documenting his income was not an issue.   The lenders that focus more on Toby’s monthly bills are much more likely to approve him than the lenders that give weight to total debt levels.  We suspect that this is the issue with the ELFI and Laurel Road approvals that became rejections.

By the time Toby submitted his documents to Laurel Road and ELFI and got rejected, things were looking pretty bleak.  Fortunately, SoFi came through on the interest rate that they had promised.  Due to limited final approvals, choosing the best lender option became pretty clear.

The New Loan

Toby’s new loan now has a 20-year repayment plan.  While the interest rate is not great, it is still a savings over Toby’s old loans.  Additionally, the extended repayment length means Toby’s monthly bill is significantly lower.  The  flexibility will be very helpful to Toby as he pursues his other goals.

Winner: SoFi @ 6.125% for 20 years

To find the lowest possible rate, be sure to look into a number of different student loan consolidation companies.  Making a deal with the first lender you check could be leaving money on the table.  Had Toby just applied with one or two lenders he might have lived with a couple rejections.  By shopping around his student loan situation got much better.  Our complete list of national student loan refinance lenders is a good place to start.