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Refinance to private and principal paydown strategy after REPAYE $0/mos for 1st yr

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  • Refinance to private and principal paydown strategy after REPAYE $0/mos for 1st yr

    My question is, when I refinance to a private lender for the lower interest rate, is my accumulated interest on my federal loans required to be payed down before I can pay down the principal with any extra loan payments on my now newly refinanced private loan? My thinking is that I'll use the $0/mos REPAYE option for my first year of payments and save the extra money I would have had to pay each month towards my loan as a one-time lump sum payment towards principal after refinancing to a private lender. Thoughts? Thank you for your time.

  • #2
    There will be no 'accumulated interest' after you refinance. What essentially happens when you refinance is one bank pays off the entirety of a loan to another bank (principle + interest) and then you have a new loan with new terms. The only thing that matters for you is what is the effective interest rate in repaye with the subsidy vs. the refinanced rate. Go with whatever option has the lowest rate.

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    • #3
      I've plugged a few numbers into an amortization schedule with different interest rates for comparison, and even with a higher loan total after applying the accumulated interest for a year and subsequent capitalization of my loan with REPAYE, the amount of interest paid over the same 2 year period is significantly less than then if I went for a loan with a lower interest rate originally with private lending. True that the loan balance will be lower if I paid the loan down with a smaller interest rate over the same 2 year period, but that seems to be at the cost of a lot of wasted money towards interest that I wouldn't be paying if I did REPAYE for 0/mos for a year then used the extra funds for a lump sum payment towards interest.

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