Why doesn't everyone refinance their loans? Or am I missing something here?

[youraverageasia]

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I'm going to be a dental student so obviously I have been researching loans and ways to pay it back. From what I understand is, when you refinance a loan you get a lower interest rate which to me sounds like a deal everyone should take. So why doesn't everyone do this? I feel like there is an obvious reason but I just can't figure it out.

 

[DrBowtie]

I'm going to be a dental student so obviously I have been researching loans and ways to pay it back. From what I understand is, when you refinance a loan you get a lower interest rate which to me sounds like a deal everyone should take. So why doesn't everyone do this? I feel like there is an obvious reason but I just can't figure it out.

PSLF

 

[Blessthefall]

I'm going to be a dental student so obviously I have been researching loans and ways to pay it back. From what I understand is, when you refinance a loan you get a lower interest rate which to me sounds like a deal everyone should take. So why doesn't everyone do this? I feel like there is an obvious reason but I just can't figure it out.

You're joking right? When you refinance, yes, you will receive a lower interest rate but you will be paying off the loan for a significantly longer amount of time. In fact, with refinancing, you end up paying more interest over the life of the loan. Additionally, you'll lose the amenities that the fed offers and be subject to the policies of a private financial institution. Refinancing isn't a fairy tale alternative; it's got some cons.


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[youraverageasia]

You're joking right? When you refinance, yes, you will receive a lower interest rate but you will be paying off the loan for a significantly longer amount of time. In fact, with refinancing, you end up paying more interest over the life of the loan. Additionally, you'll lose the amenities that the fed offers and be subject to the policies of a private financial institution. Refinancing isn't a fairy tale alternative; it's got some cons.


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In your opinion when is it smart to refinance vs just paying off the loan normally?

 

[Blessthefall]

In your opinion when is it smart to refinance vs just paying off the loan normally?

Making that decision is contingent upon a ton of variables but the absolute instance where I would elect to refinance is if I was on the verge of default and had exhausted all of the possible options available through the fed. Being able to make the payments monthly and protect the credit score/ history is a must as your future depends upon it.


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[Plastikos]

You're joking right? When you refinance, yes, you will receive a lower interest rate but you will be paying off the loan for a significantly longer amount of time. In fact, with refinancing, you end up paying more interest over the life of the loan. Additionally, you'll lose the amenities that the fed offers and be subject to the policies of a private financial institution. Refinancing isn't a fairy tale alternative; it's got some cons.


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What? Neither of your conditions are necessarily true, and they hardly make any mathematical sense. They are basically the exception to the rule, but would be hard in real life to do. Loan payback terms can be short or very long in either program, that is your choice and can change it anytime. With refinancing, unless you chose on purpose a program length so long that it accumulated more interest, it would be very difficult to pay more interest. Its just the simplest level math and wholly apparent during the process. In fact your totals, term, etc...is all right there to see before even committing, or you could use excel.

Not all loans are federal and their "amenities" arent that life changing. Unless you're going for a PSLF type thing, refinancing makes 100% sense. What does refinancing have to do with a credit report/score? I've refinanced 3 times this year, bought 2 houses and my score just improves.

For details that are less prescriptive and more in reality visit WCI, learn all about the pros/cons, etc...dont just take someones word for it.

 

[Blessthefall]

What? Neither of your conditions are necessarily true, and they hardly make any mathematical sense. They are basically the exception to the rule, but would be hard in real life to do. Loan payback terms can be short or very long in either program, that is your choice and can change it anytime. With refinancing, unless you chose on purpose a program length so long that it accumulated more interest, it would be very difficult to pay more interest. Its just the simplest level math and wholly apparent during the process. In fact your totals, term, etc...is all right there to see before even committing, or you could use excel.

Not all loans are federal and their "amenities" arent that life changing. Unless you're going for a PSLF type thing, refinancing makes 100% sense. What does refinancing have to do with a credit report/score? I've refinanced 3 times this year, bought 2 houses and my score just improves.

For details that are less prescriptive and more in reality visit WCI, learn all about the pros/cons, etc...dont just take someones word for it.

If you would have read my statement, it actually stated that if I were unable to make the payments on my loans, I would refinance to protect my credit score. Once payments are missed, your credit score takes a hit. You're so clearly informed, I would assume you to know that.

And the sarcastic criticism of the fed's amenities I find amusing. I would think that the average person would appreciate IDRP, Deferment, Forbearance, etc that is much easier to obtain through the fed than Sallie Mae for instance, considering they're the highest purchaser of federal student debt.

If you lower your monthly payment and extend the payment period, you very well could end up paying more in interest over the life of your loan. Of course not everyone is going to elect for that and it's subjective to each borrower to make these decisions- a statement I also made previously.


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[Blessthefall]

Do I personally think that refinancing is a bad idea? Not at all, in fact, I would elect to do so but the question wasn't "Would you refinance?" It was "Why doesn't everyone refinance?" So I'm extending possible answers to a question.


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[Plastikos]

You're joking right? When you refinance, yes, you will receive a lower interest rate but you will be paying off the loan for a significantly longer amount of time. In fact, with refinancing, you end up paying more interest over the life of the loan. Additionally, you'll lose the amenities that the fed offers and be subject to the policies of a private financial institution. Refinancing isn't a fairy tale alternative; it's got some cons.


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Obviously using deferment is nice, but those have decreased in length over time and are limited. When they run out, refinance if you dont have access to a forgiveness or pslf/ibr situation thats better. Forbearance just accrues interest, no real benefit to that its more of a trap than an amenity. You did not qualify in your statement above, you said "you will", and "in fact....you end up paying more", etc....not you may or could depending on the exact set of circumstances. In reality, given the current spread from fed to private rates its nearly impossible even with having longer terms on the refinanced debt to pay more interest, and even with shortening the payback periods you are usually still paying less than the others.

Both of the above bolded statements are flatly wrong, it would be laughable if it wasnt so serious a subject. No if ands or buts. Not your first statement, nor the last, both just wrong. Youre follow up response did indeed say there were "variables" but made it seem like the clearly obvious best solution unless your hand was forced is to not refinance, which is an just again incorrect. When you refinance you choose the term, the associated rate and all of that is under your control, you are not forced into doing something worse than your current situation which is how you painted it. Which is again blatantly misinformed and dangerous to allow to go unanswered. Your matter of fact way of stating things without any reference to circumstances in your first post makes it seem cut and dried, which it isnt.

 

[fahimaz7]

I refinanced from a 10 year loan with Navient to a 7 year loan with Earnest. I'm saving 2.5% interest and almost 100k of cash. Loans will be paid off in 5 years or less.

 

[SigmaFS]

There are a few reasons why you wouldn't want to refinance:

1. Loss of federal loan options - PSLF (loan forgiveness more applicable for MDs/DOs), repayment options such as IBR, PAYE, REPAYE.
   • REPAYE is of particular importance to medical residents and dentist with high student debt to income ratios.
2. The presumption you'll receive a lower interest rate.
   • Most refi lenders determine their interest rate on London Interbank Offer Rate (LIBOR) which has moved up significantly over the last 18 months (http://online.wsj.com/mdc/public/page/2_3020-libor.html)
   • The rate you're offered is dependent on your income and credit score.
3. Opportunity Cost - what financial opportunities have you lost or delayed as a result of refinancing and prioritizing that debt services. Have you delayed retirement savings? Or, delayed purchasing a dental practice?

We've been at historically low interest rates for the last 8 years approximately. We may be returning to more normalized rates. If so, refi rates may not be as competitive in the next year or two.

 

[Plastikos]

It will be a long time before rates reach a point where their worse than the 5-6.8% many people currently have. If you have poor credit you should get to work on that ASAP and you dont have any choices anyway.

Refinancing was cheaper than any of those programs for me (IBR iirc, couldnt do pslf), the interest rate change makes all but the best rate loans more likely to be a better option. You'd have to weigh and calculate the projected debt service load to see what option is your best. If considering a loan for practice or anything, debt service weighs in heavily in your debt/income ratio, refinancing can sometimes help put this into a better ratio.

My opinion on saving for retirement vs. loan payoff is opposite of most on this site and many blogs, I think its most important to get that compounding going asap.

 

[dpmd]

Refinancing is beneficial if you can get a lower interest rate (not everyone will qualify for that), and if you can afford to make the payments with a loan term that doesn't have you paying a bunch of extra interest. I think the poster above talking about paying for a longer time is referring to consolidation type loans that are designed to lower your payments. I don't see a good reason to do that when there are options that would essentially do the same for you with the federal loans (though there might be a scenario where the person has reckless spending and consumer debt has grown so much and it isn't taken into account by the federal loans).