It’s almost impossible these days to go on any personal finance blogs that discuss student loans in depth and not see articles/ads/links on refinancing. There are several major student loan refinancing companies right now that are starting to have a large presence online, but newer companies are popping up every day as well. Especially for people that graduated with similar debt to that which we have (interest rates in the 6-8% range), refinancing is almost a no brainer.
If you don’t know what refinancing is, here’s the quick and dirty: Refinancing is basically paying off an old loan by taking on a new loan for the same amount but with better terms. It’s really no different than refinancing a car or a house.
Some people confuse refinancing with consolidating, which isn’t quite the same thing. Consolidation combines several loans into a single loan for the primary purpose of making loan payments simpler, because they are only being serviced by one lender. Sometimes this includes better terms on the loan, but not always.
If you have several federal student loans that you’ve combined into one through the government, you’ve consolidated. If you’ve used a private company to combine both your federal and private loans into one group, and you’ve gotten better terms on your loan, you’ve refinanced.
In most cases, refinancing will be the right thing to do for student loan borrowers. Typically, it’s going to lower the interest rate and minimum payments on your loans. Sometimes it will shorten your loan terms. Even better, there are other times when it does all three! It’s hard to argue against the math when it comes to refinancing.
So why haven’t we done it yet?
There are going to be times on this blog when I talk about decisions we’ve made or philosophies we have on our own finances that fly in the face of logic. Today is going to be one of those times. This is a good moment to remind the readers that I’ve said it before and I’ll say it again: We are not finance experts. We are largely self-educated in personal finance thanks to books and blogs. Sometimes, like today, we’ll have an opinion that is contrarian and may be quite “wrong” from a logical standpoint. This is your friendly reminder that you alone are responsible for your own financial decisions.
With that out of the way, let’s cut to the chase: I’m definitely guilty of being an overthinker from an emotional standpoint. Sometimes this benefits me, but most often it doesn’t. For every time I overthink a decision and make a choice based on emotion that I feel good about, there’s 10 other times I have “Decider’s Remorse.” Usually it’s a mild case, but it’s still enough that I end up stressing myself out again just trying to decide if the decision I’ve already made was the right one. Other times, I’ll get into a sad cycle of talking myself out of every decision, a classic symptom of “Paralysis by Analysis.”
In short, I’m indecisive. I’m fully willing to admit that our actions, or lack of, towards refinancing our student loans may be a reflection of that indecisiveness. That being said, up to this point we are still very comfortable with our conscious decision to not refinance, and here are several reasons why:
1. We like the hardship protections that our government-owned loans provide us.
Because our loans are backed by the US government, we are largely worry-free in terms of ever having trouble paying them off. There are policies in place to help out borrowers in most serious scenarios, from job-loss, to disability, to death. These are issues we hope we never have to deal with, but it’s nice to know that in the event of my untimely demise no one will be coming after my family to collect on my unpaid student loans. Most private student loan refinance companies are starting to put similar policies in place, but we’re still most comfortable with our government notes.
2. Our current loans provide us the most freedom in choosing what to do with our money.
As we’ve mentioned before, we try to pay a little over $7,000 towards our loans every month. That’s the number that will get us to our goal of being done with them by 8/1/2020. But that $7,000 goes far above and beyond what we are required to pay; our actual minimum payment due each month amounts to just a little over $1,800. So more than $5,000 of what we pay towards our loans each month could be considered “elective.” If we really wanted to, we could put that money somewhere else; invest it, spend it, or give it away. We could even use it as emergency fund money if we got in a pinch. None of those are things we want to do with that extra money, but it’s nice to know that if we needed to, we could.
3. We have better cash-flow now than we would have under privately refinanced loans, making us more attractive to other lenders.
I know what you’re thinking: We’re supposed to be talking about getting rid of debt, not borrowing more! That’s true, but there are a couple of hypotheticals where borrowing more would be a legitimate possibility for us.
The first would be if a change in family situation forced us into needing a larger house (like another kid or two). The second is the more likely situation, and probably the number one reason we haven’t refinanced; a potential opportunity for the W-2 worker to buy-in to their employer’s practice exists. This is a scenario that is potentially not too far away, and having that extra $5,000 cash-flow each month should theoretically make lenders feel better about our ability to pay-off any new debt (read: business loan) we may take on.
4. A change in governing policy could conceivably get our loans discharged.
An obvious pipe-dream, and probably not even worth mentioning. Crazier things have happened though, amirite?!
More than any other reason, our decision to not-refinance thus far comes down to not wanting to lose that “cash-flow advantage” we have with our government loans. Whereas our minimum payment due each month with our current loans amounts to about $1800, if we refinanced with a private company we would likely be on the hook for 3x that.
Obviously, we’re paying more than that now, so it really shouldn’t be a big deal, but practically, we would go from having free cash-flow of over $5,000/month to only $2,000, in exchange for an interest rate that was 2-2.5% lower. Over the next 3 years, that would save us over $7,000 in interest, which isn’t a number to sneeze at. Like I said, the math doesn’t support us on this one.
Lately, I’ve read some interesting takes on refinancing that basically suggest you wait to do it until you’ve paid off a certain amount of your loans and your debt-to-income ratio is below a specific threshold. The more I read about this strategy, the more appealing it becomes to me; it’s entirely possible we make the move to refinance sometime in the near future, we just aren’t ready yet.
That doesn’t mean you shouldn’t be refinancing your own loans, though! There are plenty of great companies out there to choose from, and the logic and the math usually support refinancing. You should evaluate your personal situation and decide for yourself. We’re simply giving an explanation for why refinancing isn’t right for us, at least right now.
The bottom line is this: I sleep a little better at night knowing we have good cash-flow and a “cushion” if we need it. I think of that $7k of extra interest we’ll pay as an (extremely) expensive insurance policy we’ve taken out to give us the ability to have that cash-flow cushion, and also to have governmental protections on our loans from personal hardship.
Whatever makes you sleep better, right?
What do you think of our decision to not refinance? Does our reasoning make sense, or are we just throwing money away? Let us know in the comments!