Refinancing with Earnest
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When I first learned about student loan refinancing, it seemed like a dream come true. Refinancing would lower my monthly payment and interest rate. Instead of working with four different lenders, I could simplify to just one.
I had visions of being debt-free in just a few years, but I almost overlooked one crucial piece of information.
Fortunately, I realized my mistake just in time. Read on to learn how I almost made my student debt even worse.
How does student loan refinancing work?
When you refinance your student loans, a new lender pays off all your private and federal loans. Then, the lender issues you a new loan with a different repayment plan.
If you have a relatively high credit score and income, your new lender will offer low interest rates and monthly payments. Just like with your old loans, you can choose a repayment plan of five, 10, 15, or in some cases, 20 years.
With a lower interest rate, you could pay a lot less for your loan in the long run. Plus, you don’t have to deal with a bunch of different monthly payments — you’ll make just one.
Student loan refinancing is an excellent way to make your student loan debt more manageable. But before refinancing, make sure you completely understand your new loan’s terms.
I almost added two years to my student loans
All I had to do was choose my terms. Wanting to avoid the risks of a variable interest rate, I honed in on the 10-year plan with a fixed interest rate of 5.5%. The plan would reduce my monthly payments and interest rate overall.
I started to fill out the paperwork for my new loan, but it was only at the last minute that I realized one major oversight.
I was already two years into my current 10-year repayment plan. By agreeing to a brand new 10-year plan, I’d be starting over and tacking on two more years to my repayment.
Adding time to my loan meant adding interest
Even with a lower monthly payment and interest rate, the new loan would cost me more money in the long run. Loans accumulate interest on a daily or monthly basis. By extending my term by two years, I’d end up paying a lot more in interest.
My current loans total $30,000 and have an average weighted interest rate of 5.7%. Over the eight years I have left to pay them off, I’m going to pay $7,428 in interest.
The refinanced loan had a lower interest rate of 5.5%. But because I’d be paying for 10 years rather than eight, I’d pay a total of $9,069 in interest.
Adding two years to my repayment term, therefore, would cost me $1,641 extra in interest. Going from a 5.7% to a 5.5% interest rate wasn’t enough of a decrease to save me money. Thankfully, I realized my error before signing the final page and quickly withdrew my application.
Don’t assume a refinanced student loan will save you money
A refinanced student loan won’t save you money in every situation. You must be mindful of the length of your repayment plan as well as its interest rate. In my case, the interest rate deduction (only 0.2%) wasn’t enough to justify two additional years of student loan payments.
But adding time to your loan term isn’t always a bad thing. If you significantly reduce your interest rate, you could still save money overall.
For instance, let’s say my original loans had an 8.6% interest rate. If I had refinanced to a 10-year repayment plan at 5.5% interest, I would have saved $2,528. Even though I’d be paying for two extra years, the interest rate would have dropped enough to save me money.
Refinancing can lower your monthly payments
On the flip side, perhaps your goal isn’t to save money on interest. Maybe all you want to do is lower your monthly payments. You may not mind spending a little more in the long run as long as your monthly payment doesn’t break the bank.
If I had accepted my refinanced loans, I would have saved $40 every month. If I really needed that extra $40, the new terms may have been a good financial decision.
Whatever your situation, clarify your financial goals before refinancing your student loans. With all the different options for loan terms, it’s easy to get caught up in the weeds — carefully review the new terms of an education loan before you refinance.
Calculate your savings before refinancing your student loans
How can you do the complicated math of comparing loan terms? Use the calculator below to help.
First, enter the total amounts of your loan along with your average interest rate. If you’re not sure how to average your interest rate, use a weighted average interest rate calculator.
Add the remaining term on your loans. If you’re two years into a 10-year repayment plan as I was, enter eight years.
Then, enter the new loan amount, interest rate, and repayment plan. The calculator will show you how much extra you’ll save (or spend) over the years.
Student Loan Refinancing Calculator
Should you refinance your student loans?
There are two main reasons why student loan refinancing wasn’t the right decision for me. First, my student loans have relatively low interest rates below 6%. That’s because most are federal, and one comes from a customer-friendly credit union. In my case, refinancing wouldn’t lower my interest rates much.
The second reason was that I wasn’t prepared to switch to a five-year repayment plan. Even though I would have saved money overall, the monthly payments were just too high.
If you’re ready to take a more aggressive repayment stance, refinancing could also be a beneficial option. The best refinancing candidates have a strong employment outlook and a steady income. Plus, they have relatively good credit scores.
Finally, refinancing could lower your monthly payments, even if it doesn’t save you a ton in the long run. Maybe lowering your monthly bill is all you need to take control of your student debt.
Whatever your situation, refinancing could be the best decision you make with your student loan debt. If you get a good offer, make sure to run the numbers before signing on the dotted line.
Learn more about the pros and cons of refinancing your federal and private student loans.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.98%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|