Cheaper To Keep Her? Should I Refinance My Student Loan?

As of today I have $31,341.30 in student loan debt. Like most people in the throes of paying off their loans, I want it to go away. Yesterday. Every month when that Mohela notification shows up in my inbox I just want to

Deb Smush

I will readily admit that my debt burden is light. I have family whose loan payments take more than 50% of their post tax income. At its highest my monthly minimum required 10% of mine and now it’s down to 6%. Nearly 80% of that money goes to principal. And to keep it one hundred, I could write the payoff check today if I wanted.

so what's the problem

It’s not really a problem, more like a dilemma. So I already established why I am keeping my student loan debt for now. Basically, it’s math. Foregoing 8%+ growth to avoid 3.5% interest? Those dollars don’t make sense. My student loan is like an annoying mosquito buzzing in my ear while I sleep. I want to kill it but it’s not killing me. Since I’ve made the decision to hold the debt I now must decide how I’m going to service it.

Ay, there's the rub

I currently have a ridiculously low interest rate. However, it is variable and rising steadily. Before my job was eliminated my plan was to use cashflow from my bonuses and the increase in post tax income from September thru December in order to finish paying the loan by early 2018. Well I made plans and God was like

laughing out loud

I will no longer be throwing gobs of money at my loan. Keeping cash on hand during periods of (f)unemployment is the right move. I also will not be deferring my loan payments. Because I have a variable rate this sets up my own personal game theory quandary. I can either do nothing, keep my $365/month minimum payment, and hope interest rates don’t spike; OR I could refinance to a low fixed rate but raise my monthly payment by more than $200/month.

what am I gonna do X2

While I do not want to increase any of my monthly payments if I will be out of full-time employment for six months or more, I also do not want the financial equation of keeping the debt to flip during that time. If it does, due to having no income I would not be in a position to use the gift of good credit to renegotiate more favorable terms. If I’m going to refinance it has to be done now while I am still an employee. Since I now have two full years of bonus payments that can be calculated into my income I should be able to qualify for a 3.6% rate (3.1% with discounts) on a 5 year loan. Although I could make the $579/month payment work within my budget, I’m debating whether the certainty of having a fixed rate is worth the hit to cashflow.

In discussing my impending layoff with a colleague he was adamant that I not pay off the loan. The loan is cheap, cash on hand matters more than eliminating debt, and my money was better off being invested. Intellectually, I know that this is all true. However, the cloud of “what if” makes me nervous. What if my interest rates stop making the slow climb in .1% increments and spike to 5 or 6%. What would that do to my monthly payment? What would it do to the overall repayment picture? Does it make sense to make a hedge now? Is it really not that deep either way?

what do you think

 


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6 thoughts on “Cheaper To Keep Her? Should I Refinance My Student Loan?

  1. Here is my take. If you listen to the Janet Yellen of the World, interest rate might not spike for some time. Inflation is not that high at the moment so there is minimal risk.

    Make the calculation with the monthly payment if rate increases to 6% for instance (which would be insane but who knows), if you are still somewhat comfortable with that amount. I would say keep it as is.

    Usually, in Financial matters, waiting it out tend to often be a better move than being proactive. I say keep it like it is now.

    (Meanwhile, I can only DREAM of having a loan at 6% in my neck of the woods. Le Sigh)

    Liked by 1 person

    1. First, can I just say that I’m so happy to have a regular commenter. It makes me feel legit. Second, I appreciate the advice. I am leaning toward keeping things as they are. I wouldn’t lose in the long run by refinancing but it would definitely take up more cashflow in the present. Thanks for offering your insight. It is appreciated.

      Like

  2. Hey there,

    I enjoy your blog, and the gifs fit quite nicely. It is also refreshing how open you are with your current situation, but more importantly with the numbers.

    It is hard to say which way to go and which is better. The dilemma between debt and investment will always be the same: time and uncertainty. It sounds like you have a path outlined and you are trying to lay the groundwork to get to the end point.

    It’s funny though we are in similar situation (minus the job thing) but have decided to take opposite paths. Will continue to follow your journey.

    Like

      1. I decided to pay it off by the October of next year.

        The plan is to throw the sink at it until it’s gone. I have talked to soFI and several other banks, but I don’t like the variable options. Too many uncertainties and I dislike that. And given my day to day job, it makes me worry about what may come tomorrow. In terms of income, I am comfy, but I can’t let this thing sitting there and paying someone extra cash, just because. I just decreased my 401k contribution the other, and it hurts, to be honest. However, the goal is to pay everything in the short term, so I can enjoy things later.

        Like

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