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Student Loan Refinance, Capitalization (is that a thing)?

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  • Avatar greenishcan 
    Participant
    Status: Physician
    Posts: 1
    Joined: 06/10/2019

    I have a colleague who is interested in refinancing a IBR type plan to a private lender as they finish residency and enter the attending world.

    He was quoted a change from high 6’s to low 6’s in interest.

    I haven’t explored the process that much but one thing came to my mind and couldn’t find many good threads after googling around:

    1) Does refinancing with a private lender trigger any capitalization? Or is that a concept specific to federal loans?

    E.g., will the interest balance remain the same and adopt the new lower interest rate

    OR

    do they get a new principal calculated and the interest rate is calculated off that?

    2) The reduction in the interest rate doesn’t seem that great, I was personally thinking he should strive for a lower rate if they’re gonna do it (like mid to low 5’s if possible). Any recommendations for lenders from people who have gone through the process?

    #220705 Reply
    Dreamgiver Dreamgiver 
    Participant
    Status: Physician
    Posts: 866
    Joined: 03/09/2017

    1. Yes, any outstanding interest is rolled into the new loan and becomes part of the principal
    2. Start here: https://www.whitecoatinvestor.com/student-loan-refinancing/

    Different lenders use different algorithms so it’s hard to tell exactly what rates you end up with without applying. I personally had good luck and service with Earnest. I agree that 6% sounds on the high side. I ended up doing variable when I first got out of residency to take advantage of the lower rates when the principal was the biggest and refinanced every 6-12 months to keep it low, locked at 3% about a year ago for the final 18 payments.

    #220730 Reply
    Avatar MFC 
    Participant
    Status: Dentist
    Posts: 5
    Joined: 06/09/2019

    After you read up on the article from Dreamgiver, I would look into REPAYE. I have REPAYE and my effective interest rate is in the low 3%. I have looked into refinancing with private sector, and the quotes I got were all higher than my effective interest rate.

    #220737 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 516
    Joined: 06/12/2017
    1) Does refinancing with a private lender trigger any capitalization? Or is that a concept specific to federal loans?

    Click to expand…

    Yes, when you refinance, you will be borrowing the amount necessary to pay off your loan principal and any unpaid accrued interest. So, in essence, you are capitalizing your interest when you refinance.

    2) The reduction in the interest rate doesn’t seem that great, I was personally thinking he should strive for a lower rate if they’re gonna do it (like mid to low 5’s if possible). Any recommendations for lenders from people who have gone through the process?

    Click to expand…

    If those are the rates your colleague is being quoted, it sounds like their credit score is not the greatest or they haven’t received competitive rates. I generally suggest that the refinancing rate is at least 0.50% lower than their current rate.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #220738 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1316
    Joined: 02/15/2016

    That new quoted rate is really high for what most people refinance to. Most should be around 3-4%. Lower rates are for variable rates and for shorter terms. 20 year fixed probably is around 6%.

    #220739 Reply

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