The risk in refinancing student loans
A personal look at the experience of refinancing student loans; weighing pros and cons; and working through the process.
Anyone on here like to be proven wrong when waging bets? How about being proven wrong when money is involved? Does the very thought of it make your stomach turn? Yeah, me too. But risk aversion is something I had to get over this year if I ever want to get my student loans paid off.
When you think about it, the current student loan system is great and terrible at the same time. On one hand it allows young, unproven borrowers like I was take out large sums of money for education. On the other hand I paid the price dearly with student loans that had interest rates ranging from 2.99-8%.
Therein lies the problem.
I was treated with the same borrowing consideration at 18, 25 and then again at 35 by the government.
For the most part, my newly established credit and now excellent credit were weighted relatively the same. Which means even after my credit had been proven, there wasn’t really a way for me to ask for a lower interest rate. That’s a major problem because no matter how much I want to pay down my loans, my high interest rates were holding me back. So when I heard about refinancing student loans at super low variable rates, I thought it was insane. A scam really.
Then I started to read about the companies who refinance in the private market like CommonBond, SoFi and Earnest. When I read up on their founders, their track records, and their methods of selecting borrowers, I saw a system that is, in many cases, stacked against the average college grad in favor of higher earners like Ivy league doctors, lawyers, etc. Case in point, when I first reached out to companies like SoFi a year and half ago my degree didn’t even make the list of degrees accepted for refinancing. That made me angry but I understand why they started from this angle. Luckily, over time the market for private refinancing has grown and so have their lending capabilities.
I think these companies have been so successful because people like me are straddled with debt and need help. Many times we have great credit scores and just need a lower interest rate to really move things along. The tough part is you generally will get a much better variable rate than fixed rate (typical of loans) which means you have to be able to swallow a bit of risk.
This is a hard mental barrier to get over if you grow up financially unstable like I did. Your ultimate goal is to have stability, so is it smart to start to take on risk which could land you in a very bad spot?
For some of us the answer is yes. Sometimes you have to embrace risk in order to have a larger pay off.
The thought of the Fed raising interest rates kept me up many nights before I made the decision. Ultimately, after reading historical patterns I also felt like it would take at least a year or two before the fed caught up to my old interest rate of 5.75% — if ever. So I finally went for it this spring. I refinanced my 5.75% loans down to 3% variable.
Since refinancing with CommonBond I saw a HUGE difference in the progress of my payments. My payment amount increased because I am on an accelerated timeline, but I also saw a huge increase in the amount actually going toward the principal. It’s been such a big difference in my mental outlook toward the loans. I am no longer staring a 30 year agreement. I have 5 years or less to knock this shit out, and I have every intention of doing so.
I admit I have been a little ashamed to tell anyone I refinanced at a variable rate. We have all heard the horror stories of people that borrowed at variable rates only to be hit by outrageous interest rates as the economy takes off.
The thing I want to say about this fear, and many fears we have about the future, is that those fears are not real.
We can calculate, research, predict and talk it out forever. The truth is we can only make the best choices with the information we currently have. That’s all that matters ultimately anyway. Because the right choices are the ones we make with good intentions and with the best information we have at the time. We can’t control the future but we can control how we feel right now.
Sometimes that means letting the dice roll and seeing where life takes us.
I might read this post two years from now and say “Fuck! How could I have been so dumb?” but the truth is, I could also read this post two years from now and say “Yes! I fucking nailed it!”
Those moments when we risk it all and actually win are the ones that make us glad we believed in and banked on ourselves.