A (more) Powerful Plan for Repaying our Student Loan Debt
Last time we talked student loans was about six months ago -- Just 4 weeks after we took our budget by the reigns and committed to making some big changes. To say that we were a bit inexperienced in the realm of student loans at that time would be an understatement. We've done a lot of research and work on our personal finances since then, and we found ourselves ready to step up our debt repayment game. This is the first of two posts on how we set a more powerful plan for repaying our student loans.
If you were a Mindfully Spent reader at our 4 week mark, you know that our line of thinking went like this:
- My husband and I are both somewhat recent graduates who work in public service.
- We are both likely to continue this work for at least the next ten years.
- We are both eligible for "Public Service Loan Forgiveness". (Basically, this means that we can use a payment plan based on our income, make a lower monthly payment for ten years, and any remaining balance at the end of that ten years on our federal loans would be waived in return for our public service.)
With an admittedly large sum of loans between the two of us, Public Service Loan Forgiveness sounded like a smart plan. After some initial reading on the topic, we did a massive amount of paperwork and put an income-based repayment plan in place. This reduced our monthly expenses by more than $500 each month, giving us an extra $6,000 each year that we have been using to pay down our higher interest consumer debt!
That extra monthly money gave us a lot of momentum. Now, we're car payment free and on track to have zero consumer debt within about six months (that final credit card balance is dropping rapidly!). With the end of our consumer debt in sight, we've begun setting our eye on more ambitious goals. This meant it was time to take a second look at our student loan debt.
I immediately found multiple ways to immediately improve our student loan payoff plan.
The private student loan in our midst.
When we took a second look at our student loans, I noticed that one set of payments was proportionally much higher than the others. It didn't take much digging to figure out that this particular payment was made up of two private student loans. Because they were private loans, they weren't eligible for income-based repayment and they would never qualify for any other federal benefits like loan forgiveness.
THE BAD NEWS.
The monthly payment amount of our private loans was substantial (about $460 per month), and the interest rate was very high for student loans at an average of 9.5% between the two of them.
THE GOOD NEWS.
With our consumer debt soon to be paid in full, we were ready to set our sights on a new challenge. We set two new goals for our private student loans: 1) Refinance the dickens out of this debt and get it on a lower interest rate; and 2) Pay it off as quickly as possible!
Rapidly paying down this loan would give us an extra $460 per month that could go toward future savings, investments, or travel. If we could renegotiate for a lower interest rate, then I estimated that we could realistically have the entire balance paid off in just over three years.
Our student loan refinancing story.
As I read up on student loan refinancing, the stories were intimidating. Many lenders wanted students to have individual incomes of more than $70,000 per year. In addition, many seemingly responsible folks had stories of being denied for their student loan refinancing. All in all, I didn't let this intimidate me.
My husband and I would be cosigning on the refinance, and we make a solid income combined. Also, thanks to some hard work, both of our credit scores now fell in the very good to excellent range (depending on which rating company you use). Unfortunately, I would quickly learn that I was overly confident and unfamiliar with the rigorous process of student loan refinancing.
CHOOSING OUR LENDER.
I kept hearing good things about three potential services: LendKey, SoFi, and Credible. I was attracted to LendKey because it offers you financing options from credit unions across the nation. Credible provides it's customer with options from banks who are competing to refinance your loans. And SoFi sounded interesting because it's a reputable, web-based lender that was described as offering incredibly competitive rates for folks who weren't making a lawyer or engineer's salary.
All three of these companies provided us with refinancing offers based on the information we initially provided and our soft credit check. (If you are saying "Woohoo! They did it!", you are celebrating too early.) I started with the most competitive offer (from LendKey), and submitted a formal application. I have bought a house and refinanced mortgages and taken our vehicle loans in the past, and I felt good about refinancing our student loans. I had never been denied for credit of any kind, and I didn't expect that to change now. I was wrong.
A SAD BUT COMMON EXPERIENCE.
Even though we had great credit, no late payments, and a recent history of paying off a vehicle loan and substantial credit card debt, LendKey denied our loan. SoFi was next up. SoFi's process was a bit longer, but ultimately they too sent us a denial. As someone who had never been denied any type of loan or credit, I felt shaken and (to be honest) a bit ashamed. As my husband put it, we were a sure bet. It was a bit daunting to have experienced firsthand the kind of experience others had wrote about in being denied student loan refinancing.
IF AT FIRST (AND SECOND) YOU DON'T SUCCEED...
Credible had offered us an interest rate of 6.04% (5.79% after a .25% deduction for setting up automatic payments). This was still a remarkable reduction compared to our current loans. Armed with this info (and the fact that multiple applications in a close period was likely to be seen as "rate shopping" and not cause as much damage to our credit), we doggedly decided to file one more application.
Luckily, this is not a "Strike three, you're OUT!" kinda story. Credible connected us with Citizens Bank, and Citizens Bank was happy to accept a refinance from two clients with decent income and a high credit score. (Phew!) And of course we set up our automatic payments up immediately so that we could reap the rewards of that extra .25% discount.
With our new, lower finance rate obtained, we're excited to move into rapid repayment mode! We plan to begin making super-sized payments as soon as our final credit card debt is obliterated later this year.
In part two of this series, I'll take about the second arm of our smarter student loan repayment plan -- Smart financial strategies for public service loan forgiveness (aka, how we're tackling our federal loans).