HELP! To refinance or not to refinance?

So…should I refinance my federal student loans?

COVID-19 has meant many terrible things for the world, families, and individuals. And while it might be very mercenary to say it in this moment, one of the other things it has meant is a sharp economic downturn with interest rates at their lowest in two years. For that reason, despite saying I would not consider another student loan refinance until December of 2020 when I had expected to have paid off Private Loan 1, Private Loan 2, and have a better debt-to-income ratio, I am now considering it again…

So…should I refinance my federal student loans?

My current federal student loan profile is the following:

Fed

Using the Credible App, I sought to prequalify to see which rates I might be offered by lenders. Credible came back with the following offers, all offered by SoFi:

Rate 1: Fixed at 4.76%, monthly payment of $586.00, 15 year repayment term
Rate 2: Variable at 4.76%, monthly payment of $586.00, 15 year repayment term
Rate 3: Fixed at 5.22%, monthly payment of $502.00, 20 year repayment term
Rate 4: Variable at 5.22%, monthly payment of $502.00, 20 year repayment term

I would, without a doubt, save money on a refinance. The difference between a 4.76% and a 5.806% interest rate is significant. It becomes even more significant if you consider that 5.806% is not a weighted average and I have significantly more student loans at the higher 6.8% interest rate.

However, once you move federal student loans to a private lender, you lose all of the protections of a federal loan, which include in-school, unemployment, disability, and death protections. (Although, death is mitigated to some extent as my employer provides a free insurance policy in the amount of one year’s salary, and I pay $1.20 a month for $50,000 of additional insurance, which is more than enough to cover any outstanding obligations I currently have in the event of my untimely death).

So…should I refinance?

Private Student Loan 1 and Revised, Revised Goals

So in a recent post, I shared that I used the balance transfer method to transfer my Private Student Loan 1 balance to two of my credit cards, using a 0% interest for 12 months, balance transfer offer. I initiated that process this past Saturday and as of this morning, Wednesday, August 7th, I have transferred the funds in full to my student loan lender (I intentionally did not use the words “paid off” here as I didn’t payoff anything, I just reorganized my debt).

Private Loan 1 Balance (Paid to Student Loan Lender): -$9,817,69
Discover Card Balance: -$3,450.50
Citi Card Balance: -$6,695.00
Private Loan 1 Balance (After transfer to credit cards): -$10,145.50

If you read my post, you know that $295.50 of the balance increase resulted from the balance transfer fees. However, if you subtract $295.50 from the new balance, you would notice that there is still a small difference of $32.31. That difference was an overestimation on my part. Unfortunately, unlike a lot of lenders which allow you to get a payoff estimate, my student loan lender did not and I didn’t do the math. Ugh.

In any instance, I will make very little progress on this loan this month because I used the leftover from my August 1st salary (which wasn’t a full salary because I didn’t start at the beginning of the month) to finish cash flowing my moving/settling expenses (seriously, moving from literally one side of the country to another is not cheap). While it is disappointing that I won’t make much more progress on my student loans this month than the minimums, I knew this was a possibility and I’m grateful not to have had to go into debt or touched my emergency fund (look C, I can find a bright-side too!). So onto the revised, revised goals…

August 2019 Goal – My goal this month is to cover the cost of the balance transfer fees and, add the difference mentioned above, so that my balance on September 1st is the same or lower than the balance on August 1st. On September 1st, when I get my first full paycheck from my new job, I should be able to make the first really significant dent in this loan. My goal in August is also to find my first/initial side hustle. 

When checking my accounts this morning (I told you, I do this almost obsessively), I noticed that despite being a 0% for 12 months, 3% balance transfer fee offer, Citi said my offer end on 6/1/2020 (see below). While I have zero plans to have this debt lingering around that long, it did make me think more about how I should pay these two debts. While I initially thought I might pay the minimum on Citi and chuck everything at Discover, the smaller balance of the two, now I am not so sure. While Discover does have the smaller balance, their balance transfer doesn’t expire until 8/16/2020, two months later (again, even though I have every intention of having this paid off well before then, a buffer is always good).

CE

DE

Revised 2019 Private Student Loan 1 Goal – Payoff my Citi balance ($6,695.00). While it would be much easier to list the smaller debt as the goal, that wouldn’t really push me. I want something that is going to push me to hustle and sacrifice. It’s literally going to take everything I have and then some but I really want this for myself.

Okay. This should be the last post this week, I promise.


Debt Psychology: The Balance Transfer Strategy and Private Student Loan 1

Interest sucks. And it sucks because its effects are both material and psychological. Each month it deftly diminishes the significance of your payments, siphoning hard earned dollars meant for the principal. And while you understand logically that this is how it works, that this was the bargain, it still sucks and you can’t help be anything but sad.

As I look down the long road of debt repayment, I have spent countless hours scouring the internet for debt repayment hacks to help me pay off my massive debt more efficiently. The most ubiquitous suggestion is to refinance. Unfortunately, despite having very good credit (FICO 791) I didn’t qualify for a refinance because my debt to income ratio (DTI) is too high. That sucked. It really sucked because I was not attempting to refinance the entire balance but just the non-university private loans (~$40,000.00); and, ultimately, the minimum payment for the refinanced loan would have been less than I currently pay on the individual loans. So I kept reading and kept looking for things I could do. Another strategy I came across was called the “self-refi” or “balance transfer strategy.”

While there are countless other blogs that will explain this method in greater (and better) detail, essentially, you accept a balance transfer offer that allows for a direct deposit into your checking account and then use that amount to pay off your student loan. (Note: Because student loans are not bankruptcy eligible but credit cards are, some credit card issuers will not allow you to use balance transfer funds to pay off student loans. Fortunately, some do).

There are two rationales for me using the balance transfer strategy: 1) Saving on interest and 2) the psychological benefit of seeing every dollar I save or hustle for go towards a principal payment reduction. I will return to these rationales in a bit, but first, the nitty gritty of my balance transfer.

First, I accepted a balance transfer offer from two of my creditors (Discover and Citi). While it would have been preferable to transfer the balance to one creditor, at present, I do not have a credit line large enough to accomplish this. So two creditors it is. Financially, there is no real impact to using two creditors, it’s just less convenient. Both creditors offered me a pretty standard balance transfer 0% for 12 months and a 3% transfer fee (this really is the pretty standard offer, although I have seen 15 months offered at account opening and USAA apparently occasionally floats a 0% balance transfer fee to some of their members).

Discover

Disc

I forgot to grab a screenshot for Citi but it looked quite similar…

Citi

Total Transfer Amount: $6500.00
Total Transfer Fee: $195.00
Remaining Credit: $605.00

So the total amount for the balance transfer requested was $9,850.00. I will use this to payoff Private Student Loan 1, which currently has a balance of -$9,812.49 at 9.74%; I was worried about how long I would have to wait until I could pay it off, but the August statement posted this morning so as soon as I receive the funds from Citi I will pay it off. This process has happened pretty quickly. I pulled the trigger and made the balance transfer request on Saturday and as of today, Monday morning, Discover has already deposited the money into my checking account.

Now, before I return to the rationales, let me address some of the concerns any reasonable person reading this post might have…

Objection 1: An accelerated, adjusted repayment schedule might result in no savings using the balance transfer strategy.

This is true. Assuming I paid off Private Loan 1 in December, which was my midyear revised goal, I would actually lose money on interest. According to the Student Loan Amortization Calculator I used, if I paid off the loan in December, I would lose $56.00 in interest, which is the difference between the interest I would have owed the student loan lender ($239.00) and the balance transfer fee I paid Citi and Discover ($295.50).

Date Interest Principal Balance
Aug, 2019 $79 $1,920 $7,838
Sep, 2019 $64 $1,936 $5,902
Oct, 2019 $48 $1,951 $3,951
Nov, 2019 $32 $1,967 $1,983
Dec, 2019 $16 $1,983 $0
2019 $239 $9,758 $0

But I am a very reasonable woman, and despite my intent to hustle my tush off over the next few months, I figured it was probably unlikely that I would get this done by December. So I calculated what the interest would be if I paid the loan off in March 2020. The difference this time, of $64.50, is interest saved doing the balance transfer over continuing to pay the student loan lender.

Date Interest Principal Balance
Aug, 2019 $79 $1,186 $8,572
Sep, 2019 $70 $1,195 $7,377
Oct, 2019 $60 $1,205 $6,172
Nov, 2019 $50 $1,215 $4,958
Dec, 2019 $40 $1,224 $3,733
2019 $299 $6,025 $3,733
Jan, 2020 $30 $1,234 $2,499
Feb, 2020 $20 $1,244 $1,255
Mar, 2020 $10 $1,255 $0
2020 $61 $3,733 $0

And, just as a thought exercise, if I were to extend repayment over the full period of the balance transfer, I would save $226.50 in interest.

Date Interest Principal Balance
Aug, 2019 $79 $777 $8,980
Sep, 2019 $73 $784 $8,197
Oct, 2019 $67 $790 $7,406
Nov, 2019 $60 $797 $6,610
Dec, 2019 $54 $803 $5,807
2019 $332 $3,951 $5,807
Jan, 2020 $47 $810 $4,997
Feb, 2020 $41 $816 $4,181
Mar, 2020 $34 $823 $3,358
Apr, 2020 $27 $829 $2,529
May, 2020 $21 $836 $1,693
Jun, 2020 $14 $843 $850
Jul, 2020 $7 $850 $0
2020 $190 $5,807 $0

It should also be noted that the interest savings assume that I pay the same amount each month. If I paid less (or more) the interest would also fluctuate accordingly. The balance transfer fee is not subject to such fluctuations so whether I pay it slowly over the full term or more quickly, the amount of the transfer fee stays the same.

Objection 2: Student Loan interest is tax deductible whereas credit card interest is not.

Also true. However, the amount I pay in student loan interest always exceeds the tax credit. This might be of greater concern in the future as my student loan balances decrease, however, as my DTI improves, I would like to apply for a traditional refinance.

Objection 3: If you don’t pay the amount off during the balance transfer period, the balance will be subject to a much higher rate of interest than the original student loan.

Also true. But don’t worry. I got this. I kid, I kid. While I do like the idea of a hard deadline and a bit of pressure to pay this off, I would like to payoff far more than just this loan by next year at this time. Additionally, the amount that I would need to pay each month to have this loan paid off by the end of the balance transfer period is rather reasonable ($857.00) and at the very least, I expect to be able to pay that each month, especially now that I am a bit more settled and can begin to hustle.

Objection 4: FICO doesn’t weight installment debt and credit card debt the same. Your FICO score is going to take a hit.

Absolutely true. The transition of this debt from installment debt to credit card debt is pretty big. My credit utilization is going to go way, way up (it’s currently 0-1% depending on when the statement cuts) and I expect my score to drop, at least temporarily, by between 50 and 100 points (the swing could be that large because I am still relatively young with a relatively shorter credit history). I would never have embarked on this strategy if I knew that I would need credit in the near future. As I do not, and the hit will be temporary, this was not a huge consideration for me.

Now, those initial objections at lease cursorily addressed, let us return to my rationales for the balance transfer…

1) Saving on interest. – This was addressed extensively above. As long as I pay off the amount after December 2019, I will likely save a tiny bit on interest.

2) The psychological benefit of seeing every dollar I save or hustle for go towards a principal payment reduction. – As you might have expected, the largest benefit to this strategy for me is psychological. I can’t speak about the experience of anyone else, but when I am targeting a debt, as I am targeting Private Student Loan 1, I log into the dashboard and look at the debt frequently. It is disheartening to see the balance gain interest every day and to not actually see the fruit of my sacrifice. (Skip buying a new pair of shoes so that you can make an extra $30 student loan payment, watch the loan gain that amount in little over a week in interest). With the balance transfer, every dollar I save or earn will chip away at the amount I owe. While I know that it would be better to be motivated by the interest that accrues each day, I’m not there yet. And as my journey will be a long one, anything I can do to keep myself happy and focused is worth its weight in student loan debt.

Thoughts?