- When I took out student loans to go to school, I was able to get government loans at a fixed rate of 6.21%.
- In the middle of my studies, however, my parents offered to "refinance" my loan by repaying it with their home loan line, with the understanding that I would repay them at the rate of their own loan.
- Because of their generosity, I am particularly motivated to repay my loans. At the rate that I'm going to go, I should be able to pay them out about six months earlier than originally expected and spend about $ 9,000 less.
- Read more personal financial reporting »
I'm lucky in many ways, but being able to "refinance" my student loans with the help of my parents is one of the biggest.
I had no credit from my undergrad, but when I went back to school to get my MBA, I needed financial help.
When I applied for loans by completing the FAFSA, I was granted a small, subsidized loan and enough non-subsidized loans to cover my education. I started my MBA in 2014 and most of my student loans were direct unsubsidized loans serviced by NelNet with a fixed interest rate of 6.21%.
It was expensive, but I knew I wanted to change from technology to a different role. I also love to study, so I would really go to school for the rest of my life if I could afford it.
Until I finished school, I would make a substantial monthly payment.
My parents refinanced my loans at a lower interest rate
When you refinance your loans – usually through a private lender – the lender buys up your original loans and pays the lender instead of the original lender, usually at a lower interest rate.
It's pretty much what my parents did for me.
About halfway through my degree, I spoke to my parents about my loan and my finances in general. They mentioned the idea of repaying my student loans on their home loan line, and then I would owe them something instead. At that time, her home equity line of credit had a variable subprime interest rate of 2.49% – significantly lower than the interest rate on my student loan.
However, I had to take into account that the home loan line had a variable interest rate (which could change and possibly increase in the future) while my student loans were fixed.
After thinking about it for some time, I decided to speak to my parents about their offer.
The savings were too good to miss
The total amount of my loan at the time it was repaid and placed on the home equity line was $ 38,764. For the rest of the MBA period, my parents paid my tuition fees through the home equity line of credit. And while I was in school, I made payments on the loan that were roughly equivalent to the interest accrued each month. I owed a maximum of $ 70,377 on my loan.
The interest rate has changed several times since 2016 when my loan was switched to the home equity line, but a maximum of 4.49% (in June 2019), which is still significantly below my fixed rate with my original student loan.
Since I graduated from school, I've increased the amount I pay on my loan as much as I can monthly. Since I'm a full-time freelancer and have a variable income, the amount I pay changes monthly, but I was able to pay out more than $ 15,000 in 2019 alone. Even so, I still owe $ 53,000 on my loan. So it will take me a while to pay the rest of the way.
I did an analysis to compare what I should have paid in total with my NelNet loan compared to what I am currently paying. I assumed that I paid $ 100 a month for my loan during my school days, $ 750 a month for four months after I graduated, and then $ 1,500 a month thereafter. For the loan through my parents, I also assumed that the interest rate would remain unchanged (also for a variable loan that is not specified, but I only used a fixed interest rate for the calculation).
When I know that my parents are so generous, I want to pay even faster
Assuming I continue to pay out $ 1,500 a month and have paid $ 1,500 with my NelNet loan, my parents' willingness and ability to help me would allow me to repay my loan half a year earlier: in January 2023 instead of July , Over time, I'll save a total of $ 9,353.
While in a way I would rather owe my parents than the government, I was a little nervous when I owed them so much money. At the time I transferred my loan to them, I was still in school and only worked part-time as a freelance writer, which meant I didn't make much money and couldn't make large payments.
During my MBA, I built up some freelance writing. Since I am now used to making monthly payments on a regular basis and doing my career well, I am more inclined to repay my loan faster than I think it would be if I owed the government something. I want to cancel my loan to my parents because they did something generous that they absolutely didn't have to do.
Obviously, it is not an option for everyone if your parents refinance your loans. However, I saw firsthand the difference that refinancing for a lower interest rate can make. Many private lenders offer refinancing student loans. So make sure you get offers from multiple lenders before you decide to refinance. So you should confirm that you will ultimately save money. Also, note that when you refinance public loans with a private lender, you are no longer able to use income-based repayment plans and qualify for credit.
But if these programs don't matter to you, consider how much you can save.