Best advice I can offer on student loans: If at all possible, avoid them.
That said...
Back in 2004, my wife graduated from Columbus College of Art and Design. It's a great school, she got a great education, and she wouldn't trade her experiences there for anything. Great schools, however, come at a cost, and she took out several student loans. For some reason or another, very few loans were available through government, and most of her loans were private loans through banks. We consolidated the federal loans early on to lock in an interest rate, but I didn't look into private loan consolidation (shame on me). 3 years later (2007), interest rates had risen greatly, and I investigated consolidation. I did my research, and the best I could do at the time was a fixed rate of 9.66% for 30 years. I don't recall the exact interest rates of the loans I was consolidating, but this was a good rate at the time. I know, ewww.
Fast forward 5 1/2 years later. During that time, the economy, eh, not so much. Over the years, I had looked for different ways to lower the interest rate. With the economy the way it was, banks weren't looking to loan money for private student loan consolidation. Finally, the economy started picking up, and at the end of 2012 I found a place called custudentloans. My biggest concern was, the interest rate is variable. However, the interest rate is tied to LIBOR, which is very stable, and likely to stay very low for several years (according to a friend of mine from high school, who now works in all manner of financial things). And looking at the previous 9.66% interest rate, a nice 4.75% rate sure sounded good. Add to that, the loan was only a 15 year loan. And did I mention that the new monthly payment was 21% lower than the old one?
Because my brain likes comparisons, here's a few key comparisons between the old and new:
Caveat: The numbers below assume the interest rate wont rise above the 4.75% that it currently is. However, it will, that's pretty much a sure thing as the economy improves. More on that below.
Old: 24.5 years @ 9.66% fixed. 294 monthly payments remaining.
New: 15 years @ 4.75% variable. 180 monthly payments remaining. 21% lower payment.
New loan will be paid off 9 1/2 years sooner than the old loan. (but wait, there's more! See below...)
That's right. Paying 21% less each month will still save 9 1/2 years of payments compared to the old loan.
Another Caveat: The numbers below reflect extra payments I made. First month, regular payment. Second month, extra 18%. Third and subsequent months, extra 36%. Keep in mind, however that the extra 36% on the new loan is equivalent to only 12% extra on the old loan. During the previous 5 1/2 years, I had paid an average of 10% extra per month, so really it's only 2% greater than what I was paying on the old loan. Confused yet? I hope not. And remember that 2%...
Averaging the last 6 months of the old loan:
19% of the money went to principal.
81% of the money went to interest. (Ouch)
1.1% of the principal was been paid off (approx 2.2% per year).
Averaging the first 6 months of the new loan:
58% of the money went to principal.
42% of the money went to interest. (Still ouch, but less ouch)
3.5% of the principal was paid off (approx 7% per year).
The first 6 months of payments on the new loan paid as much down on the principal, as the last 19 months on the old loan.
Remember that 2% extra I'm paying? 2% seems really small, but it compounds. In interest you pay, that's bad, but in principal you pay off, that's good. No, that's great. Just by paying that extra 2% (compared to the old loan) each month, my new loan will be paid off in 9 years, 8 months instead of the original 15 years (terms of the new loan), or 24.5 years (terms of the old loan). Total savings: 14 years, 10 months (178 months) of payments. Maybe I'll bump up the payments a bit, just to make it an even 15 years of savings. :)
Pay down the principal as fast as you can. This is especially important to me on this loan, because of the variable interest rate. Someday, hopefully later than sooner, the interest rate will rise, meaning my monthly payments will rise. The more I pay off the principal now, the less it will cost me in the future when interest rates rise.
That orange/blue stacked graph up there? Every month, the orange (money applied towards interest) will grow smaller, and the blue (money applied towards principal) will grow larger. That was true of both the old loan, and the new one, it's just that with a lower interest rate (new loan), and in particular with a lower interest payment and additional payments (new loan w/extra payment), much more principal comes off the loan each month, meaning less money in the future towards interest. It's inherent in a standard loan: each month you (hopefully) pay the previous months' interest, and some of the principal. The following month, because you paid off some of the principal the previous month, your interest (your cost for borrowing the money) wont be quite as high as the previous month. Because of that, this month, a little bit more of your money goes towards the principal, because you have less interest to pay. And so on and so forth, repeat until the principal is gone.
Which brings us to the final graph. This blog is all about making good decisions. One good decision is education. Another good decision is saving as much money as you can, when paying for that education. Refinancing our private student loans will save us 55-58% over the life of the loan.
Do you have private student loans? Are you interested in refinancing them? If you click my referral link for custudentloans and refinance, I get a nice thank you from them. And you'll get a nice thank you from me. :)
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