Student loan refinance - variable vs fixed

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Topic Author
Gemini
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Student loan refinance - variable vs fixed

Post by Gemini »

I have significant student loan debt at relatively high rates and I am considering refinancing. When going through the process, I have the option of going for a fixed rate or a variable rate that is tied to the LIBOR. I realize the LIBOR is low now, but I am hesitant to lock in a variable rate and then end up paying more over time.

Some specifics:

Total student loans are about 250K
I plan to refinance about 160K

Rates:
5 Year Variable** - 2.64% - 3.44%
10 Year Variable** - 2.64% - 3.64%
15 Year Variable** - 2.99% - 3.74%
20 Year Variable** - 3.74%
5 Year Fixed - 3.50% (3.75% without EFT discount)
10 Year Fixed - 4.50% (4.75% without EFT discount)
15 Year Fixed - 5.50% (5.75% without EFT discount)
20 Year Fixed - 6.25% (6.50% without EFT discount)
*Rates assume a 0.25% discount for making automated payments from a bank account (which is opened for you automatically when you complete the application process).
**Variable rate based on 3-month LIBOR: 3-month LIBOR +2.40-3.20% (determined by additional underwriting review) for the 5 year variable, +2.40-3.40% for the 10 year variable, +2.75-3.50% for the 15 year variable, and +3.50% for the 20 year variable. Borrowers who take out a variable loan with a term of 5, 10, or 15 years will have maximum interest rate of 9%. Borrowers who take out a 20-year variable loan will have a maximum interest rate of 18%.


I plan to pay these off ASAP, but realistically it will take me about 5 years.

Given the above scenario and assuming a payoff schedule of 5 years, what would be the wiser choice?

Thanks for your input.
MooseandBear
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Re: Student loan refinance - variable vs fixed

Post by MooseandBear »

How frequently could the variable loans change interest rates? Is there a max to the annual or monthly jumps?

What is your current mix of loan amounts, length of loan, and interest rates?
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grabiner
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Re: Student loan refinance - variable vs fixed

Post by grabiner »

If you are going to pay off the loan in five years, the five-year fixed rate makes the most sense. There is no point in taking a higher rate to get a longer term that you won't use. And the five-year variable versus five-year fixed is a risk premium. Given that the current difference between short-term and intermediate-term rates is more than 1% (compare, for example, Vanguard Short-Term and Intermediate-Term Treasury), you should prefer to borrow at intermediate-term rates if the cost is no more than 1%.
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Topic Author
Gemini
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Re: Student loan refinance - variable vs fixed

Post by Gemini »

MooseandBear wrote:How frequently could the variable loans change interest rates? Is there a max to the annual or monthly jumps?

What is your current mix of loan amounts, length of loan, and interest rates?
From reading the fine print, it seems the variable changes every 3 months based on LIBOR.
Borrowers who take out a variable loan with a term of 5, 10, or 15 years will have maximum interest rate of 9%.
Borrowers who take out a 20-year variable loan will have a maximum interest rate of 18%.

Not sure about length of loans, but it is Sallie Mae so guessing on a 30 year schedule.
About a 100K at 8.25%, 60K at 6.8% - these are the ones I want to refinance.
Also have another 100K at about 3.5%
Last edited by Gemini on Tue Jun 17, 2014 8:34 pm, edited 1 time in total.
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Gemini
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Re: Student loan refinance - variable vs fixed

Post by Gemini »

grabiner wrote:If you are going to pay off the loan in five years, the five-year fixed rate makes the most sense. There is no point in taking a higher rate to get a longer term that you won't use. And the five-year variable versus five-year fixed is a risk premium. Given that the current difference between short-term and intermediate-term rates is more than 1% (compare, for example, Vanguard Short-Term and Intermediate-Term Treasury), you should prefer to borrow at intermediate-term rates if the cost is no more than 1%.
My strategy is to pay off in 5 years, but I don't want to get burned hard with more interest if it stretches to 5.5 or 6 years given unforeseen circumstances.

I need to clarify what happens if one opts for the 5 year fixed, and, for some reason, the repayment exceeds the 5 year benchmark.
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grabiner
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Re: Student loan refinance - variable vs fixed

Post by grabiner »

Gemini wrote:My strategy is to pay off in 5 years, but I don't want to get burned hard with more interest if it stretches to 5.5 or 6 years given unforeseen circumstances.

I need to clarify what happens if one opts for the 5 year fixed, and, for some reason, the repayment exceeds the 5 year benchmark.
If the loan is for a 5-year term, this can't happen; you will have fixed monthly payments for five years and they will pay off the loan on schedule. Therefore, you can't take a loan with a 5-year term unless you can afford the payments.

If the rate is fixed for five years and then becomes variable, you will pay interest in the sixth year only on the remaining balance after five years.
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MooseandBear
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Re: Student loan refinance - variable vs fixed

Post by MooseandBear »

Gemini wrote:
grabiner wrote:If you are going to pay off the loan in five years, the five-year fixed rate makes the most sense. There is no point in taking a higher rate to get a longer term that you won't use. And the five-year variable versus five-year fixed is a risk premium. Given that the current difference between short-term and intermediate-term rates is more than 1% (compare, for example, Vanguard Short-Term and Intermediate-Term Treasury), you should prefer to borrow at intermediate-term rates if the cost is no more than 1%.
My strategy is to pay off in 5 years, but I don't want to get burned hard with more interest if it stretches to 5.5 or 6 years given unforeseen circumstances.

I need to clarify what happens if one opts for the 5 year fixed, and, for some reason, the repayment exceeds the 5 year benchmark.
You can't have a five year loan and take longer than the five years to pay it back, unless you refinance again. A five year loan means it is completely paid off by th end of five years. It sounds like you cannot be certain you will be able to pay them off in 5 years, thus you'll have to take the 10 year term. I'd vote for the fixed rate too. More certainty, less risk.
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JonnyDVM
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Re: Student loan refinance - variable vs fixed

Post by JonnyDVM »

When faced with the same proposition I decided to go with a variable rate because my wife and I plan to pay all the loans off within two years. For your five year timetable the decision is tougher. Sounds like you definitely want a ten year loan term in case you can't do it in five. My friend who recently refinanced with DRB has a similar timeline to yours and is a little more afraid of rising interest rates than I am. He was able to do 1/2 of his loans at a variable rate and 1/2 fixed to temper his risk against rising interest rates. Thats something you may want to ask your loan provider about.
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MooseandBear
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Re: Student loan refinance - variable vs fixed

Post by MooseandBear »

OK, I opened my mortgage spreadsheet (downloaded free from the web) and ran some options just so we have some facts to work from.

If you did $160K at a 5 year term at 3.5% fixed rate, your monthly payment would be $2,911. Your total interest payment over the five years would be $14,641.

If you did $160K at a 10 year term at 4.5% fixed rate, your monthly payment would be $1,658. Your total interest payment over the ten years would be $38,986.

If you did $160K at a 10 year term at 4.5% fixed rate, but paid it off in five years (i.e. early), you'd pay $1,658 (mandatory monthly payment) plus $1,350 (extra monthly payment) for a total of $3,008 per month. The total interest paid over the five years would be $19,052.

Based on what you told us, if I were in your shoes and wasn't confident that I could handle a $2,911 monthly payment every month, I'd do the $160K at 10 year fixed. That way my mandatory payment would only be $1,658 but I could try to pay as if I was on a 5 year term. If life intervened, I would know that I could revert to paying just the mandatory payment amount, buying my family flexibility.

I chose to refi to a fixed rate because the variable was too uncertain for me. YMMV. The suggestion above to refi the two loans separately is interesting. You could try to do that for different term lengths or variable/fixed. If your refi lender doesn't allow refinancing the loans separately, refinance one this month, and then the other one in a month or two.
HMan768
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Re: Student loan refinance - variable vs fixed

Post by HMan768 »

I considered refinancing my student loans as well (similar amount). I have all stafford loans and considered going to SoFi. I eventually decided against it because of some of the advantages that Stafford loans provide that SoFi does not. The biggest were that 1) if I were laid off I could easily defer my loans and 2) if I were to become disabled stafford loans are forgiven. Because I was going to pay my loans off so quickly I figured that the interest savings (a few thousand) would not be worth the risk I would expose myself and my family to.

Just some food for thought :happy . I completely understand why someone would decide the other way...
LongerPrimer
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Re: Student loan refinance - variable vs fixed

Post by LongerPrimer »

in 2005 we refi student loans PLUS and unsubsidized Stafford from 2.5% (4.5% highest -1.5% low) average variable interest to 3.5% fixed, 25 and 20 yr , -0.75% reduction for ontime payments. At this time, student loans were pegged to, June's 6month, T-bills. I figured that interest was about as low as there were going to get. I was wrong but, the now the sub-3% loans are still pretty good.

Looks good. Lucky you.
Topic Author
Gemini
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Re: Student loan refinance - variable vs fixed

Post by Gemini »

grabiner wrote:
If the loan is for a 5-year term, this can't happen; you will have fixed monthly payments for five years and they will pay off the loan on schedule. Therefore, you can't take a loan with a 5-year term unless you can afford the payments.

If the rate is fixed for five years and then becomes variable, you will pay interest in the sixth year only on the remaining balance after five years.
Yes - this is what I figured. I am about 99% sure that I should be able to pay the refinanced loans off within 5 years, but there is always that "what if" scenario.
Topic Author
Gemini
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Re: Student loan refinance - variable vs fixed

Post by Gemini »

JonnyDVM wrote:When faced with the same proposition I decided to go with a variable rate because my wife and I plan to pay all the loans off within two years. For your five year timetable the decision is tougher. Sounds like you definitely want a ten year loan term in case you can't do it in five. My friend who recently refinanced with DRB has a similar timeline to yours and is a little more afraid of rising interest rates than I am. He was able to do 1/2 of his loans at a variable rate and 1/2 fixed to temper his risk against rising interest rates. Thats something you may want to ask your loan provider about.
Ya I am playing around with numbers and trying to see if it makes sense to go half and half.
Topic Author
Gemini
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Re: Student loan refinance - variable vs fixed

Post by Gemini »

MooseandBear wrote:OK, I opened my mortgage spreadsheet (downloaded free from the web) and ran some options just so we have some facts to work from.

If you did $160K at a 5 year term at 3.5% fixed rate, your monthly payment would be $2,911. Your total interest payment over the five years would be $14,641.

If you did $160K at a 10 year term at 4.5% fixed rate, your monthly payment would be $1,658. Your total interest payment over the ten years would be $38,986.

If you did $160K at a 10 year term at 4.5% fixed rate, but paid it off in five years (i.e. early), you'd pay $1,658 (mandatory monthly payment) plus $1,350 (extra monthly payment) for a total of $3,008 per month. The total interest paid over the five years would be $19,052.

Based on what you told us, if I were in your shoes and wasn't confident that I could handle a $2,911 monthly payment every month, I'd do the $160K at 10 year fixed. That way my mandatory payment would only be $1,658 but I could try to pay as if I was on a 5 year term. If life intervened, I would know that I could revert to paying just the mandatory payment amount, buying my family flexibility.

I chose to refi to a fixed rate because the variable was too uncertain for me. YMMV. The suggestion above to refi the two loans separately is interesting. You could try to do that for different term lengths or variable/fixed. If your refi lender doesn't allow refinancing the loans separately, refinance one this month, and then the other one in a month or two.
Thanks for clarifying and plugging in the numbers. Very helpful!

I believe I can certainly handle $2911/month - I am just concerned about the "what if I for some reason I cannot" scenario.
The 10 year plan like you mentioned does sound enticing - only downside is the 4K or so more one ends up paying over a 5 year period.
I am curious but what would the monthly payment have to be on the 10 year plan in order to keep the total interest the same as with the 5 year plan i.e. $14,641?

As far as doing variable vs fixed - they do allow, but I am not sure I am savy enough with numbers to hit the sweet spot in terms of both saving $ and maximizing inner peace.
Last edited by Gemini on Wed Jun 18, 2014 9:42 am, edited 1 time in total.
Topic Author
Gemini
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Re: Student loan refinance - variable vs fixed

Post by Gemini »

HMan768 wrote:I considered refinancing my student loans as well (similar amount). I have all stafford loans and considered going to SoFi. I eventually decided against it because of some of the advantages that Stafford loans provide that SoFi does not. The biggest were that 1) if I were laid off I could easily defer my loans and 2) if I were to become disabled stafford loans are forgiven. Because I was going to pay my loans off so quickly I figured that the interest savings (a few thousand) would not be worth the risk I would expose myself and my family to.

Just some food for thought :happy . I completely understand why someone would decide the other way...
Good to know about the nuances of Stafford loans. I currently have about 100K in Staffords at a whooping 8%. If I was to pay these off within a year or so, I would not refinance either.
MooseandBear
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Re: Student loan refinance - variable vs fixed

Post by MooseandBear »

Gemini wrote: Thanks for clarifying and plugging in the numbers. Very helpful!

I believe I can certainly handle $2911/month - I am just concerned about the "what if I for some reason I cannot" scenario.
The 10 year plan like you mentioned does sound enticing - only downside is the 4K or so more one ends up paying over a 5 year period.
I am curious but what would the monthly payment have to be on the 10 year plan in order to keep the total interest the same as with the 5 year plan i.e. $14,641?
You'd have to pay $3833 a month on the 10 year 4.5% plan to keep the total interest paid to the $14.6K. But you'd also pay off your loan early at about the 4 year mark.
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Gemini
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Re: Student loan refinance - variable vs fixed

Post by Gemini »

MooseandBear wrote:
Gemini wrote: Thanks for clarifying and plugging in the numbers. Very helpful!

I believe I can certainly handle $2911/month - I am just concerned about the "what if I for some reason I cannot" scenario.
The 10 year plan like you mentioned does sound enticing - only downside is the 4K or so more one ends up paying over a 5 year period.
I am curious but what would the monthly payment have to be on the 10 year plan in order to keep the total interest the same as with the 5 year plan i.e. $14,641?
You'd have to pay $3833 a month on the 10 year 4.5% plan to keep the total interest paid to the $14.6K. But you'd also pay off your loan early at about the 4 year mark.
Thanks!!

I am leaning more and more towards the 5 year fixed.
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