As I updated my net worth earlier this month, I was happy to see a lot of progress being made. My debts are shrinking and my investments are investing (I can’t say growing because of what the Coronavirus is doing to the markets, but we’ll keep chugging). The one place where I haven’t seen significant change is my private student loan. I’m pretty lucky. My student loan debt is definitely not as high as it could be, but every payment I make is engulfed by interest, and it seems like one step forward, two steps back. I make a $90 payment each month, which is a bit over my minimum. Each month my interest takes up almost 10% of that payment. Then, I accrue more interest and it adds up to about $40. I didn’t realize how pitiful that was until I started doing the math. I was disbursed $5,007 for my loan in 2016. After paying each month ($25 while I was in school, the minimum, and $90 each month post-graduation for a total of $2,490), my current balance is $4,883.
Let me break that down. I’ve paid diligently on my student loan for TWO years, and my balance is not even $200 dollars less than when I started.
The worst part of this realization is, I calculated that correctly. There weren’t any math errors. All this time that I’ve been putting money into my loan, I thought I was making real money moves only to learn I’ve paid almost half the price of my loan in interest to Sallie Mae. Frankly, that’s unacceptable.
After doing some reading, I realized, first, that I have an extremely high interest rate for a student loan. According to NerdWallet, the average student loan interest rate is 5.8%. My rate is variable which means it can change as interest rates rise and fall, and it’s a whopping 10.875%. No wonder I’ve been bleeding out money. With all this in mind, I decided I need to refinance.
What’s refinancing?
Refinancing a loan basically means renegotiating the terms of your loan. You replace the loan you have with another loan in the hopes that you receive lower monthly payments and/or interest rates. You can refinance all types of loans from mortgages to auto loans and student loans. Last year, I consolidated my credit card debt into one loan from my credit union. I had such a positive experience. I lowered my interest rate, and now I’m paying my interest to my local credit union instead of a big bank which I prefer.
Banks, credit unions, and even specialized loan companies all provide refinancing. It’s great for them because now you’re paying them interest. It’s great for you because you have the opportunity to remove your payment burdens.
Refinancing my loan
I have to do a lot of research before I embark on a new financial endeavor, and refinancing my student loan was no different. I have two loans: a private SallieMae loan and a Federal student loan. I’m only choosing to refinance my private loan because 1) the interest rate is much higher, 2) there are benefits to keeping a federal student loan, and 3) my Americorps grant covers my federal loan entirely. Although I do have some other debt, my credit score isn’t too shabby (and it’s definitely better than it was when I got the loan with my cosigner), so I’m hoping for some pretty good rates. Making inquiries (aka applying for loans) does adversely affect your credit score, but by clustering those inquiries you can potentially reduce some of the effect. I don’t just want to go for the first company I see. I want to make sure I’m getting the lowest rate possible. I also want to be able to pay it off quicker if I want to without any additional fees (it’s wild how some companies will charge you for paying off your own debt! Mind your business!).
There are so many lending companies out there, and, initially, I was going to apply and get rates from around 3 to 5 of them. Instead, I found a site called Credible that does a soft inquiry and can give estimated rates from a lot of different companies. I thought I was killing two birds with one stone. After checking Credible (less than 5 minutes!), I only got rates from one lender, SoFi, because my borrowing amount was too low. I’m actually okay with that because it means I’m not trying to borrow so much, so I feel like I’m on an okay track.
I checked rates with two other lenders through their sites. The first, Earnest, where they gave me a lower rate than Credible but wanted to do a hard inquiry at the end. Another, CommonBond, couldn’t give me a rate because my loan amount had to be at least $7,500. In the end, I decided to go with the Credible lender (SoFi). SoFi has also sent me tons of junk mail, so the name recognition felt safe. I learned while applying they offer lots of perks, like access to a financial advisor, so I was excited to be borrowing from them.
But, turns out SoFi didn’t want to lend to me. After waiting a couple of days after applying, I learned that my loan application didn’t get approved. I called SoFi to learn why (and maybe charm them), but the woman on the phone didn’t know what was up. After a few minutes holding, she gave me the news: although I asked for $5,000 (their minimum) since my loan was $113 below the amount, they wouldn’t approve me. Again, it made me feel like my loans weren’t terrible, but the prospect of continuing to pay my exorbitant interest rate was pretty terrifying.
I decided to try a different provider that I had gotten a quote for that night: Earnest. They’re the ones that wanted to do a hard inquiry and had a lower rate. After I applied, I got approved immediately! This loan will drastically decrease the overall money I’ll pay back ($652 vs over $2000 with good ol’ Sallie), and for that, I’m so excited.
Refinancing is a good way to leverage your current good practices against past mistakes. It feels a lot more complicated than it actually is. If you’re looking to refinance a loan, do your research; don’t just go with the first rate you see. Credit Unions tend to offer much better rates than big banks. Most of all, remember that it doesn’t have to be as hard or scary as is it seems.
Sites I used:
Earnest (you can use this link to get a referral from moi! I get paid; you get paid)
P.S. SoFi, even though you rejected me, it’s still all love. Y’all seem cool. xoxo
