How does refinancing student loans work?

[gravenewworld]

God how I love how they never teach you personal finance in high school or even college and having to learn it on your own. Anyway, I am looking to refinance some private student loans that I have. The ones that I have now have variable interest and are at 8.75% right now. Now I am only 2 years out of college and have never refinanced anything in my life. How exactly does this work? Will the bank give me a check for the amount that my loans are for so that I can pay them off and then start charging me monthly? Will the bank just simply talk to the company that owns my loans and pay them off for me? Are there going to be any extra fees involved? Also what are some good companies for refinancing student loans?

I want to refinance with a decent or good company that will have a FIXED interest (at the lowest possible of course). Also, the student loan interest payments should still be tax deductible once I refinance right?

This past month my student loan payments made me so mad. I paid $170 at the beginning of the month for the loan and only $3 of that went to the actual principal. Any other advice before I start shopping around would be greatly appreciated.

 

[Astronuc]

Student loans are considered unsecured unless they are backed by some collateral, which most students will not have starting out.

The interest rate of of 8.75% is probably in the middle, and its about 2-3% above many mortgage rates (fixed). If one takes a fixed rate, one might be able to obtain a lower rate.

One may or may not be able to get a better rate. If possible, use some extra cash to pay off the principal. Send an extra payment and specify that it be wholly applied to the principal. That is the best way to reduce the overall cost.

 

[chemisttree]

If you are only paying such a small amount toward the principal, you might want to rethink refinancing the loan. Most long term loans have you pay a higher fraction of the interest portion of the loan early in the repayment schedule and more of the principal later in the term. The net effect is that even though you have been paying out the loan for over a year now, the balance remains essentially unaffected. When you refinance, you will be refinancing nearly the entire amount of the loan! The new loan will also have you pay most of the interest over the life of the loan early in the repayment period. The net effect is that you may be taking a step back toward paying down your loan if you refinance... just as the bank had intended!

You should ask for a repayment schedule from the bank on your present loan and see how the balance will be reduced over the life of the loan and compare that to a repayment schedule of the bank offering to refinance the loan. You should be acutely aware of early payment penalties... another poision pill the banks use to keep you from saving money on your loan. If no penalties are in the contract, do as Astronuc suggests and pay an additional amount to the bank with instructions to apply it toward your principal upon reciept. Sometimes the bank will escrow the excess payments and pay them annually unless you instruct them differently.

 

[FredGarvin]

All of my federal loans were variable. Not in the strict sense. However, they did increase in rate over the years of paying. IIRC, my Stafford loan went up to about 8% by the time I paid it off.

One thing not to forget is that student loan interest is tax deductible as long as you can prove the loan is for nothing but a student loan.

Good advice from Chemistree.

This past month my student loan payments made me so mad. I paid $170 at the beginning of the month for the loan and only $3 of that went to the actual principal.

Just wait until you are paying off a mortgage! It gets worse.

 

[gravenewworld]

wow thanks for the advice guys. some of this stuff I had no idea you could do. personal finance should be a mandatory freshman or senior class at all colleges.

 

[Astronuc]

personal finance should be a mandatory freshman or senior class at all colleges.

Absolutely! In fact, engineering students where I went to school had to take a mandatory engineering economics course, which taught us a lot about the mathematics of interest and finance, but did not go into things like mortgages and student loans. Since many students these days are taking loans, it would be prudent to take a course in personal finance. It's particularly practical when buying a new car or discussing a mortage, and then one pulls out a calculator and runs through the numbers the agent gives one - and then telling him or her, that the numbers quoted are not as good as they seem. They get very careful about trying to sell what sounds too good to be true. That can save one a few thousand dollars.

 

[Moonbear]

wow thanks for the advice guys. some of this stuff I had no idea you could do. personal finance should be a mandatory freshman or senior class at all colleges.

I think it should be a mandatory class in high school! People without college educations need to know that stuff too, and are even MORE likely to fall prey to a fast-talking loan officer. At least one can hope that a college education teaches you how to ask more questions before jumping in on these things (just as you're doing now).

 

[Astronuc]

I think it should be a mandatory class in high school! People without college educations need to know that stuff too, and are even MORE likely to fall prey to a fast-talking loan officer. At least one can hope that a college education teaches you how to ask more questions before jumping in on these things (just as you're doing now).

Good point!

I also think calculus and differential equations should be taught in 7th grade, but then that's me.

 

[FredGarvin]

Absolutely! In fact, engineering students where I went to school had to take a mandatory engineering economics course, which taught us a lot about the mathematics of interest and finance, but did not go into things like mortgages and student loans. Since many students these days are taking loans, it would be prudent to take a course in personal finance. It's particularly practical when buying a new car or discussing a mortage, and then one pulls out a calculator and runs through the numbers the agent gives one - and then telling him or her, that the numbers quoted are not as good as they seem. They get very careful about trying to sell what sounds too good to be true. That can save one a few thousand dollars.

I agree completely. Even more so than student loans are the predatory credit card offers to students. That could be an entire week of classes unto itself. I am continually amazed to see how many "educated" people there are that have no idea of the time value of money. I constantly hear people saying that X deal must be good because the payments are low.

P.S. Don't you just love going into a loan officer's office and pull out your calculator when they give you that great deal?

 

[Astronuc]

P.S. Don't you just love going into a loan officer's office and pull out your calculator when they give you that great deal?

One car dealer dude got flustered and had to leave the room to go talk to his boss - after I pointed out that I would be paying more if I got the 'low' interest rate. I even showed him the numbers. That was back when I only had a calculator.

Now I have a laptop with Excel. Muuwahahahahaaaaa!

 

[Moonbear]

I agree completely. Even more so than student loans are the predatory credit card offers to students. That could be an entire week of classes unto itself. I am continually amazed to see how many "educated" people there are that have no idea of the time value of money. I constantly hear people saying that X deal must be good because the payments are low.

Maybe it's time that high school home economics classes focused on economics of owning a home rather than baking cookies. Kids could use classes on everything from balancing a checkbook to understanding credit card interest rates, negotiating loans to renter's rights, and even some basic investment information, even if it's just understanding what a 401K or IRA are. Teach them something about how to actually survive in the world. No class can be all-inclusive, but hopefully if they are educated about some of these issues, they'll have their eyes open enough to know to ask about other issues.

 

[FredGarvin]

Maybe it's time that high school home economics classes focused on economics of owning a home rather than baking cookies. Kids could use classes on everything from balancing a checkbook to understanding credit card interest rates, negotiating loans to renter's rights, and even some basic investment information, even if it's just understanding what a 401K or IRA are. Teach them something about how to actually survive in the world. No class can be all-inclusive, but hopefully if they are educated about some of these issues, they'll have their eyes open enough to know to ask about other issues.

I would also add a section on how to understand what your credit report is and why it is important.

I would really like to see this as a senior level high school class that is a requirement for graduation. IIRC the only required class I had as a senior in HS was a government class. It has to be different now though.

 

[lara7]

Yeah in recent trends every bank is providing student loans and the interest for this is low while comparatively other loans.Other than that better consult with the Principal and get the letter about your over all fee.
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lara

http://equity.talkingfinancing.com"