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Refinance student loan for how many years?

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  • Avatar Questionable 
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    Splash Refinancing Bonus

    Hi, everyone,

    I am currently on REPAYE, making minimum payments on my $260k student loan. Graduating next year and planning to refinance the loan and pay it as quickly as possible.

    My question is, if I’m paying, say, $10k per month, is there a benefit to refinance the loan to be paid over 30 vs 10 vs 5 years? Someone told me that I save most money if I refinance to get as long of a period as I can. I am going to pay a lot monthly regardless of what the minimum payment actually is, so suppose we ignore the psychological aspect of the loan term difference.

    Thank you.

    #189129 Reply
    Avatar footguy2 
    Participant
    Status: Resident, Physician
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    Joined: 04/20/2018

    I refinanced with SOFI after residency-extremely easy. I did 5 years which dropped my interest rate from 6.8 to 4.2. It automatically takes a chunk out each month-around $3500, then I throw in whatever I have left over each month at the loans on top of it.

    #189220 Reply
    Avatar hightower 
    Participant
    Status: Physician
    Posts: 1451
    Joined: 12/07/2016

    Hi, everyone,

    I am currently on REPAYE, making minimum payments on my $260k student loan. Graduating next year and planning to refinance the loan and pay it as quickly as possible.

    My question is, if I’m paying, say, $10k per month, is there a benefit to refinance the loan to be paid over 30 vs 10 vs 5 years? Someone told me that I save most money if I refinance to get as long of a period as I can. I am going to pay a lot monthly regardless of what the minimum payment actually is, so suppose we ignore the psychological aspect of the loan term difference.

    Thank you.

    Click to expand…

    If your plan is to pay it all off asap, it probably doesn’t matter all that much, but I would go with whatever term gives you the lowest interest rate (which will probably be the 5 year).  The only thing to watch for is to make sure you can easily afford the minimum payments.  Good luck!

    #189224 Reply
    Liked by Craigy
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    If you plan to pay it off with that amount per month it will be paid off pretty quick, and thus you should take the lowest interest rate so even more goes to principle.

    That will be the shortest term. Also, you might want to consider a variable rate, that may give you even more interest rate room and with that speed it wont matter at all (aside from helping it along faster).

    #189241 Reply
    Liked by Craigy
    Avatar MaxPower 
    Participant
    Status: Physician
    Posts: 321
    Joined: 02/22/2016

    Not knowing the exact totals of loans and income, nor possible interest rates for the different loan terms, I will tell you what I did. I opted for a 10-year variable rate loan since the spread between rates for that and the 5-year wasn’t that great at the time (4 years ago now), and then paid the whole $260k thing off in 3 years. The longer term have me a slightly lower payment for months I needed it (months where I funded our backdoor Roths, or our 3 kids’ 529 accounts), but the low rate gave me considerable savings on the 6.8% rate my loans were at.

    If you’re paying $10k per month towards the loans, it probably doesn’t really matter what you choose because you’re going to be fine regardless.

    #189244 Reply
    Liked by Zaphod
    ChadCFP ChadCFP 
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    Joined: 10/04/2017

    “Someone told me that I save most money if I refinance to get as long of a period as I can.” Whoever told you this, do not take any future financial advice from them. Deal?

    At $10k per month, you will demolish these things quickly. The lowest rate I saw recently was from First Republic for a 5-year fixed at 1.95%. First Republic is kind of strange and you have to be in one of their cities to use them, they also require 10% of the loan value to sit in a checking account (makes it more of a collateralized loan which is why their rates are usually very low), and limit refis to $300k which is not an issue for you. They do however offer up to 2% prepayment interest rebate if the loan is repaid within 4 years, so if they pay at least $5.2k in interest and pay the loan off within 4 years, the rebate would be $5.2k on a $260K loan.

    Also, a variable rate would probably be fine here since your timeframe is very short, so take a look at those rates as well.

    Let’s use those numbers:

    $260,000 @ 1.95% for 5 years = $4,552/m

    Keep the same numbers but assume you do pay the $10,000/month, your loan would be paid off in 27 months (2 years & 3 months).

    Also, when you leave REPAYE to refi, you will probably have a chunk of accrued interest that will capitalize. I am not sure if your $260k accounts for that or not but I wanted to let you know.

    I love how aggressive you want to be with these loans, but don’t forget to take care of the basics as well. Max out your 401k ($19,000), your backdoor Roth IRA ($6,000), get some quality disability insurance, build up some emergency funds, etc.

    Also, don’t forget the free money for referencing the WCI when you go to Refi.

    One more thing, if you don’t plan to make this change until after graduation, try to at least cover the entire non-subsidy interest amount with each payment. For example, if you are paying $300/m right now with REPAYE, and you see that $50/m is still accruing, start to pay $350/m now. You are eventually going to have to pay back all that accrued interest, so limit the damage now if you can.

    Chad Chubb, CFP ® | WealthKeel LLC
    https://wealthkeel.com/wci | Gen X & Gen Y Physicians

    #189255 Reply
    Craigy Craigy 
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    The longest term that still gives you the lowest rate.

    Usually this is the 5 year product, but there’s a chance you might get a 7 or 10 year at the same rate as a 5.

    LEVEL 1 WCI FORUM MEMBER.

    #189264 Reply
    Liked by Zaphod

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