Courtesy of Caroline Lupini
Caroline Lupini in the Rioja Wine Region, Spain, in April 2019.
- When I took out student loans to attend grad school, I was able to get government loans at a fixed 6.21% interest rate.
- Midway through my studies, however, my parents offered to "refinance" my loan by paying it off using their home equity line of credit, with the understanding I'd pay them back at their own loan's interest rate.
- Because of their generosity, I'm especially motivated to pay off my loans. At the rate I'm going, I should be able to pay them off about six months sooner than originally expected, and spend about $9,000 less.
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I'm lucky in a lot of ways, but being able to "refinance" my student loans with my parents' help is one of the biggest.
I didn't have loans from my undergrad, but when I went back to school to get my MBA, I needed some financial help.
When I applied for loans by filling out the FAFSA, I was granted enough unsubsidized loans to cover my education in addition to a small subsidized loan. I started my MBA in 2014 and the majority of my student loans were direct unsubsidized loans serviced by NelNet with a 6.21% fixed interest rate.
It was expensive, but I knew I wanted to move away from engineering into a different type of role. Plus, I love learning, so I really would go to school for the rest of my life if I could afford it.
By the time I was done with school, I was going to be making a sizable 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 out your original loans and you pay the lender instead of the original loan issuer, usually at a lower interest rate.
That's pretty much what my parents did for me.
About halfway through my graduate degree, I was talking with my parents about my loan and finances in general. They mentioned the idea of paying off my student loans with their home equity line of credit, and then I would owe them instead. At the time, their home equity line of credit had a sub-prime 2.49% variable interest rate - significantly lower than my student loan interest rate.
However, I had to consider the fact that the home equity line of credit had a variable interest rate (it could change in the future, and potentially increase) while my student loans were fixed.
After taking some time to think about it, I decided to take my parents up on their offer.
The savings were too good to pass up
The total of my loan at the time it was paid off and moved to the home equity line of credit was $38,764. Over the course of the rest of my MBA, my parents paid my tuition through the home equity line of credit. And while I was in school, I made payments toward the loan about equal to the interest accrued each month. At the maximum, I owed $70,377 on my loan.
The interest rate has changed multiple times since 2016 when my loan was moved over to the home equity line of credit, but at maximum, it was 4.49% (in June 2019), which is still significantly lower than my fixed rate with my original student loan.
Since finishing school, I've upped the amount I'm paying toward my loan as much as I can each month. Since I freelance full-time and have a variable income, the amount I pay changes each month, but I've still been able to pay off more than $15,000 in 2019 alone. That said, I still owe about $53,000 on my loan, so it's going to take me a while to get it paid off the rest of the way.
I did an analysis to compare what I would have had to pay in total with my NelNet loan compared to what I currently will have to pay. I assumed that I paid $100 per month toward my loan while I was in school, $750 per month for four months following graduation, and then $1,500 per month every month thereafter. For the loan through my parents, I also assumed that the interest rate will remain fixed at what it is now (again, for a variable loan that's not a given, but I used a fixed rate just for the calculation).
Courtesy of Caroline Lupini
Knowing my parents were so generous makes me want to pay even faster
Assuming I continue to make $1,500 payments each month, and would have made $1,500 payments with my NelNet loan, my parents' willingness and ability to help me will allow me to pay off my loan six months earlier: in January 2023 instead of July. Over time, this will save me $9,353 in total.
While in a way I would rather owe a debt to my parents instead of the government, owing them that much money did make me kind of nervous at first. At the point in time I moved my loan over to them, I was still in school and only working part-time as a freelance writer, meaning I wasn't making very much money and couldn't make big payments.
During the time I was finishing my MBA, I built up my freelance writing business quite a bit and now that I'm used to making regular monthly payments and doing well with my career, I'm more inclined to pay off my loan faster than I think I would be if I owed the government. I want to make good on my loan to my parents, since they did something generous that they absolutely did not need to do.
Obviously, having your parents refinance your loans isn't an option for everyone. However, I've seen firsthand what difference refinancing for a lower interest rate can make. Many private lenders offer student loan refinancing, so make sure to get quotes from multiple lenders before deciding to refinance - you'll want to confirm you'll ultimately save money. Also, note that when you use a private lender to refinance public loans, you lose the ability to use income-driven repayment plans and qualify for loan forgiveness.
But if those programs aren't a consideration for you, it's worth seeing how much you could save.
- Considering refinancing your student loans to save money? Learn more about your options:
- Refinancing your student loans with SoFi could save you money - and even help you get a better mortgage rate
- Refinancing your student loans with Earnest can help you pay them back on a timeline that works for you
- Refinancing your student loans with CommonBond can get you ultra-low interest rates and 24 months of forbearance if you need it
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