Student Debt: How to Lower the Interest Rate Without Refinancing Out of The Loan Forgiveness Program

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Almost a year ago, I wrote about refinancing and leaving IBR for good. We hadn’t refinanced up to that point because we were not sure if we had the frugal muscles and the mental and emotional strength to tackle my student debt, and we knew that refinancing would mean that we could never run back to the Loan Forgiveness Program if we ever hit a rough spot. Once you refinance, you are no longer eligible for the Loan Forgiveness Program. A pro of the Loan Forgiveness Program is the flexibility to revert back to a minimal payment of a small percentage of your income when times are tough. Meanwhile, you also having the choice to pay back the debt aggressively if you are able. If you refinance, well, it’s either you make those whopping payments (which in our case is $6,500 per month) or end up in mad doo-doo if you fail to do so.

After a year of paying back debt aggressively, it was obvious that we were BOTH in it for the long haul! We were ready and capable of getting these loans out of the way. So we said, “SCREW IBR, let’s refinance!” The worst part about IBR is the high interest percent rate of 6.8%, which meant that about half of our monthly payments were going towards interest alone! YUCK. This is the main reason why we wanted out.

We were very serious about the whole thing and even started researching refinance options. The list of lenders that we found included the following:

We got quotes from every lender and were about to pull the trigger, but we didn’t.

Why? By some stroke of luck, we went down the rabbit hole of purchasing our first property and held off on the refinancing of the loans until that was secured. However, once we had settled into our new home, Mr. Debtist’s start-up company went through some tough times and Mr. Debtist’s salary went down by 50%! At the time, this seemed like terrible news, but we were actually lucky in that we hadn’t refinanced yet and life had the opportunity to teach us a lesson: that maybe the flexibility of Loan Forgiveness Program was essential. With a loan this large, the flexibility of the Loan Forgiveness Program makes our journey much more comfortable! Shortly thereafter, I had my third stroke of luck. I spoke with Travis Hornsby of Student Loan Planner. If you have not already interviewed with him and you have a lot of student debt, I would just like to say that although his calls are pricey, they are WORTH it! You’ll soon see why!

In this interview, Travis informed me of a way to improve our aggressive loan repayment strategy. I learned that by being in IBR, we were missing out on an opportunity that another loan forgiveness program offered. Which is why it is important to know the differences between IBR, PAYE, and REPAYE! We learned that REPAYE helps our significantly by covering 50% of our interest every month! Just by switching to REPAYE, we were able to save over $7k in 8 months (find out here).

Since REPAYE covers 50% of the interest, it is as if we refinanced to get a better interest rate. The interest that we have still yet to cover with our payments come out to be about 3.4% of the loans. I like to think of this as a way to get a lower interest rate while still keeping the flexibility of loan forgiveness. Even though Mr. Debtist’s job situation has stabilized, we still never know what life may throw our way. Being able to fall back on those small payments give us a lot of peace of mind. Meanwhile, we are able to funnel even more money towards paying down principal! It’s the best of both worlds.

I think that Travis saved us from making a decision that could put us in a bind during tough times, and he also helped facilitate our loan repayment journey. This is why I think it is so important to talk to someone who can really guide you find the most optimal path for your loan repayment journey, especially when you are talking about student loans this big. If you’ve been thinking about talking to someone but are not sure if it will even help, I bet you Travis is your guy. Schedule your consult with Student Loan Planner if you are feeling lost or simply looking for loan repayment alternatives.

In short, my advice is this. If your student debt is less than two times your salary, then maybe refinancing is a doable option. It won’t be easy, but it would be doable. However, tread with care. If your debt is more than two times your salary, highly consider sticking with Loan Forgiveness, even if you have plans to attack it aggressively. Only because life is a mess and would take any chance it has to throw you a curve ball. Ultimately, I truly believe that everyone can find a path that is in line with their lifestyle and life goals.

When we started, we were told that paying down our loans in ten years with our salaries was impossible. But deep down, I knew that we could do it and that it would be the best path for us. So we set a plan to pay it down in 9 years. Before we talked to Travis, I was hoping to escalate the plan even more and pay it back in less than 9 years. After we made the change to REPAYE, I now have hopes to get rid of it all in 7 years or less. We are implementing a number of side hustles and budgeting tactics that are speeding up progress! I can’t wait to see how much more we could do. Thanks for being here, supporting our journey, and following along.

Finances: Why We Are Refinancing and Leaving IBR Behind, For Good!

Before we head off to Portland, OR, we wanted to share with you guys some very exciting news! We are finally pulling the plug on student loan forgiveness, completely! We are in the process of refinancing our student loans, and leaving IBR behind, for good!

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Why haven’t we refinanced sooner, you ask? Well, there is a clause in the student loan forgiveness program IBR that states that once we refinance our loans, we will no longer be eligible for the student loan forgiveness program in the future. Meaning, if something happened, like one of us lost our jobs, we would still need to continue to make the $6,500/month payment from now until forever (or at least until we are free from the loans). If we stuck with IBR and one of us lost our jobs, we could revert back to paying the minimum payment under IBR (which is calculated as a small percentage of your income), until we could dig ourselves out of the rut. You can see why refinancing can be a tricky thing. A life event that changes our financial situation could immediately cause us to get in trouble with the IRS if we cannot maintain that $6,500/month payment. In other words, we were giant wussy pants and scared of what could happen. We were not quite ready to leave the safety of IBR when we decided to pay down our loans a year ago.

However, under the IBR program, my student loan with Great Lakes is charged an interest of a whopping 6.7%! By refinancing, we could lower that down to about 5.5%. It doesn’t seem like much, but on a loan this huge, it makes a big difference. To give readers an idea, for a 10 year refinance at 5.5%, our monthly payment would decrease from $6,500 to $5,300! Or, put another way, if we continued the course of paying $6,500/month, then we will be done with our loans in 7.5 years! I don’t know about you, but both perspectives are extremely exciting and extremely enticing.

I have spoken about us paying down $84,000 towards my student debt of $550k+ in the past year. Initially, we didn’t know at the start of our journey whether we would be able to make the large monthly payments. We wanted to try it out, but were afraid that we would not be able to support the lifestyle we want and still have enough for the loan amount. What we found was that we were able to alter our lifestyle in order to make our payments, and our lives have much improved from it. After one year, we are extremely confident that this is the path we want to take, and that we can do this! We are no longer afraid of the what-ifs and are ready to take a leap of faith (in ourselves) and just turn our backs on student loan forgiveness for good!

So what happens if some life event occurs that dramatically impacts our finances? We haven’t forgotten about the possibility of one of us losing a job, or a natural disaster happening, or a family emergency occurring, although cross our fingers, legs, toes and arms that none of these ever come to fruition. But we HAVE thought through a series of possibilities that could help us in such scenarios.

Have an emergency fund. Over the past year, we have built up an emergency fund that could support us for 2.5 months if one of us loses a job, or for a little under 2 months if both of us lost our jobs. We will continue to add to this emergency fund and over time, it should be a very big safety net for us (or it could help us pay down loans faster towards the end!) We keep out emergency fund in a Marcus High Yield Savings Account so that it grows over time.
Make use of the lower monthly payments. There are TWO ways we could make use of the lower monthly payments. The first is to pay the $5,300 per month minimum payment, and stash the difference ($1,200) in the emergency fund every month. Although a viable plan, that isn’t the path we are going to take. The other is to continue paying $6,500 a month since we can support that payment, and plan to be done in over 7 years. Because we would be paying extra $$ a month, we would be paid ahead. Meaning, if something were to happen, we would have accounted for future payments already, and would likely have a buffer of time before we are back to our originally determined schedule.
Rely on the loan’s forbearance policy. Loan companies want to get paid. If someone really cannot make payments, then the loan’s forbearance policy will temporarily allow non-payment for a set number of months. The interest will still accrue, but it is a back-up!

Luckily for us, our jobs are very flexible and we don’t really see ourselves without work for long periods of time, but you never know what the future may hold, and sometimes life gets out of control. So, yes, it IS still wildly scary for us to be doing this! Too risky for some. But I believe in our abilities and focus and determination. And we want to inspire other people to feel like they could be freed too.

How about you? Feel like this is too crazy a venture, or would you be willing to try too?

Finance: When NOT to consolidate student loans

There was a day last year when Mike, two co-workers, and I all took the day off of work, just because. I remember it vividly. It was a Tuesday and the weather was sunny, and somewhere in the low eighties. Mike and his co-workers came over to our place to work one of his motorcycles. The goal was to change the engine, but I think the boys really just wanted to take it apart and put it back together like a box of legos. Such are the interests of engineers who design electric cars all day. I did my own thing, cooking and writing, and biking, etc. The usual. Once in a while, I popped my head in the garage to watch them tinker, to observe the progress. There were times where they struggled, muscling their way into making pieces fit. Other times, they laughed, at some overlooked rookie mistake of theirs. Most of the time they were either marveling at the mechanics of it all, or otherwise criticizing some faulty housing of electric wires. I guess inefficiencies of mechanical parts are laughable, to some. Overall, they did good. The bike ran, after twelve hours of work, sweat, and metaphorical tears.

At the end of the day, we ate a much deserved dinner of Mediterranean food. As we were talking about who knows what, the topic of student loans came up. It was actually brought up by one of Mike’s co-workers who happened to be dating a pharmacist. He was the one who inspired me to write the previous blog post, and it is because of stories like these that I am determined to share whatever little knowledge I have of finances with the rest of the world.

His girlfriend was pursuing an alternative loan forgiveness program to pay her student loans from pharmacy school. As part of the Public Service Loan Forgiveness Program, she has been working for the past two years at a VA hospital in LA county. The program states that after ten years of service at a government or not-for-profit organization, the loans will be wiped, TAX FREE (compared to the IBR, PAYE and REPAYE options which considers forgiven amounts as part of your income and is therefore taxed). She has been working here for a few years and was warned against consolidating her loans by her co-workers. Why?

She had some co-workers who have been working at the hospital for a few years. The hospital started to convince them to consolidate their loans. They said consolidating multiple loans into one will be more convenient and easier to track. Some of them went ahead and did just that, after listening to the hospital’s advice. Unfortunately, there is a clause that states that after consolidation of student loans, previous payments do not count towards the loan repayment program. In other words, despite having worked for 2 out of the required 10 years, after consolidation of the loans, the previous 2 years no longer counted towards the 10 year loan repayment. The consolidated loan is now considered a completely different loan, and in order to have that loan forgiven, they will have to work for an additional ten years. It was a story enough to make one cry. Imagine working your way towards freedom, only to have that freedom taken away and prolonged. The past two years of hard work went towards nothing. The worst part? They were advised to do this! Off course, it is not the hospital’s responsibility to be aware of the clauses associated with every loan program, so we can’t entirely blame the hospital. I just wish there was a positive end result from the decision to consolidate, which there wasn’t. All for “convenience” of having one lump sum, instead of keeping track of a few different loans.

Moral of the story: Do not consolidate your loans if you have already started a Public Service Loan Forgiveness program. If you would like to consolidate your loans, please do this right out of school, prior to working for your not-for-profit or government organization. My heart seriously goes out to those who have discovered this clause the difficult way. I am just glad that our friend’s girlfriend learned of it before she herself was convinced to do the same.

In line with all other aspects of this blog, freedom supersedes convenience in my book, always. Freedom to call your own schedule. Freedom to take the day off with your friends whenever you want. Freedom to enjoy hobbies, learn new things, and work on motorcycles. Even if it means avoiding the conveniences.

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