How I’m Refinancing my Student Loan Debt & Saving $23k


Recently I graduated with my MBA and $130,000 in student loan debt. While that is a lot of money to borrow, I borrowed it fully aware of the costs, and I am confident that it was a worthwhile investment. Nevertheless, I have to repay a lot of money in the coming years, and payments begin once my grace period ends 4 months from today. So what am I going to do first? Refinance my student loan debt.

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Why Refinance Student Loan Debt?

Currently, I have $130,000 spread out among 13 student loans from various federal student loan programs. To say the least, repaying those loans individually will be a paperwork nightmare. On top of that, the loans’ interest rates vary. The average interest rate on them is 7.5% combined. If I set up automatic payments, the rate will be reduced to 7.25%.

Rather than dealing with all the paperwork and try to repay each student loan individually, I’m going to package them into one big loan called a consolidation loan and pay one payment. This process is called refinancing. If I opted to pay this loan at 7.25% over the next 30 years through a standard repayment plan with the federal government, I’d end up paying $320,400 for my MBA. Now that’s a whole lot of money.

What Options are Available for Refinancing Student Loans?

Just a few months ago, there were only two options available for refinancing my student loans: Federal Consolidation Loans and Private Consolidation Loans. Today, however, there is a new option available through a company called Social Finance (or “SoFi” for short). Here’s a quick overview of the three options.

  • Option 1: Federal Consolidation Loan – This option would entail consolidating all of my federal student loans with the Department of Education. Before SoFi went into business, this would have been the best option for me. Federal consolidation loans have flexible repayment options, low fees and decent interest rates (compared to private student loans).
  • Option 2: Private Consolidation Loan – This is a consolidation loan from financial institution. For me, this is the worst option because the interest rates are probably higher
  • because the rates are determined based on my creditworthiness. While my credit score is excellent, I’m an entrepreneur and freelance consultant. As a result, my sources of income are inconsistent and worth very little to private lenders. Furthermore, private consolidation loans tend to have less flexibility in repayment. Chances are I’d end up having to get someone to co-sign on my loan which would put their credit at risk. Not a good option for me.
  • Option 3: Social Finance (“SoFi”) Consolidation Loan – Recently, SoFi raised $77 million to launch their platform that may transform the $1 trillion student loan marketplace. In a nutshell, SoFi is a person-to-person lending platform that connects alumni investors with student borrowers from their alma mater. My alma mater, Georgetown University’s McDonough School of Business, is one of the first SoFi schools where consolidation loans are available for graduates. For an easy to understand, visual overview of their platform, check out our SoFi infographic.

My Choice: Refinance with SoFi

At the end of the day, SoFi loan consolidation is the best option for me. Why?

  • Lower interest rates: SoFi’s loans have a 5.99% interest rate (vs. 7.25% for a federal consolidation loan and closer to 10% for private loans). I plan to repay my loans over the next 20 years. With SoFi, my total cost will be $223,347, with federal loans it would be $246,597 and with private loans it would cost $301,087. No matter what, I’ll save $23,251.
  • Fixed interest rates: SoFi’s loans have a fixed interest rate (unlike many private consolidation loans). For a fixed rate private consolidation loan at Wells Fargo, I’d pay between 7.99% and 12.79% in interest. And if I chose an adjustable rate loan, I risk paying more than that if interest rates rise in the future.
  • Flexible repayment options: SoFi’s repayment options are similar to those of a federal consolidation loan. While they are not backed by the good faith of the U.S. government, they do have many of the same characteristics and fit well for my situation. Private loans, on the other hand, aren’t as flexible if you are having trouble paying them back.
  • Connections with alumni: Unlike any other option, SoFi allows me to connect with alumni from my school who have a vested interest in my success. While I don’t intend to become their Facebook friends, there is something to be said about feeling like my money is going to a community I support and who wants the best for me (assuming I repay on time;)
  • No closing costs: Some federal and private consolidation loans don’t charge closing costs or origination fees, but some do. Those that do can range from 1% to 4%. That would amount to between $1,300 and $5,200 at closing out of my pocket. SoFi doesn’t charge a dime.

My Next Steps

At this point, I’m convinced that SoFi is the best option for me. It will save me money, provide me with flexibility and help me connect with other members of my alumni community. Now all I have to do is apply for a SoFi consolidation loan and see what happens. If anything changes between now and the time I close, I’ll let you know.


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Comments

  1. PTinCA

    October 9, 2012

    Great info! I told my brother about the SoFi program to help him get through schol. Have you looked into Public Service Loan Forgiveness (PSLF) if you qualify? I am saving over $120K in student loan debt by consolidating my loans, working for a public service organization and getting the rest forgiven after 10 years!

    • Mark Thompson

      March 21, 2013

      What would be classified as a Public Service Organization?

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