Student loan refi for forgiveness

Hi, All:
I’m trying to problem solve whether or not to “roll the dice” and refinance my 27k student loan (currently held by AES at 2.65% $350 a month) into a federal loan in order to take advantage of a ‘possible’ 10k forgiveness from Biden. My largest concern: if I refi, I’ll probably be refi’ing into 6.5% apr AND forgives of any amount isn’t guaranteed. I’ve played around with some online calculators and it seems that the savings is almost negligible because of the differences in interest rates, currently paying 2.65% while the fed rate is 6.5%.
Side note, I’m a federal employee for only approx 7 years. I haven’t filed for the TPSLF because it’s doesn’t seem like it would help me given the amount of time I have left on my loan.
Any thoughts on the matter are welcome. Thanks.

Why would you make a hard personal financial decision based on a “possibility” from any politician? That just sounds crazy to me. Wait until there is something signed into law and the governing agency has made rulemakings and you’re 1000% sure you qualify for whatever loan relief you were seeking.

Tombs are full of dead people whose last words were, "Well, I thought / assumed / “felt” I was going to get (fill in the blank).

Tax deduction, loan forgiveness, a $100k starting salary out of college, Social Security was going to replace my salary, whatever stupid idea drops into their head. Don’t be that person. Why rush?

2.65% is a negative real interest rate! You’ll never get another loan like that. Keep paying the minimum.

1 Like

It sounds like you may have a private student loan. Can you even refi from private into federal? I thought it was one-way only (the other way). If so, the answer to your question is a resounding “no” because it won’t even work.

If you have a federal student loan (which you wouldn’t have serviced by AES unless your loan was from before 2010), then maybe it might make sense if you really believe what politicians say. I wouldn’t.

Yes I’m going thru the forgiveness process now. My wife hasn’t. I had federal and she had FFEL.

Smartpolitics, was your loan private and then you refi’d into federal? Mine was federal, consolidated with AES, now trying to figure out if I can/should refi again back into federal, under the new expanded program. I’ve worked 7 years with the fed gov but I’m not sure if I’ll benefit from TPSLF OR even if I’d benefit from 10k of forgiveness at 6.5% when I’m paying 2.65 right now.

So the OP would get partial forgiveness but a much higher rate? That is a question they can only answer by doing a present value calculation. They need to analyze this exactly like a house refi really except it’s a bit sideways.

In a refi, you get a lower rate but you have to eat closing costs.

In this case, higher rate but principal amount less.

Only solvable with a financial calculator, the terms of both loans, and their view of their personal cost of money (the opportunity cost of not getting forgiveness, because if you get forgiven $10k or whatever, you could theoretically invest it at whatever you think you can generate).

Less debt on the books is not automatically better. In finance the only thing that matters is inflation adjusted after tax cash flows.

Why pay the minimum? Doesn’t that just add to the principal? I can only speak from my mortgage experience, but I paid extra as much as I could to decrease the principal, and I was surprised how fast the balance decreased. I paid off a 30 year mortgage in 21.5 years (I did do a refi 7 years in from 7.5% --yes, from 1997!-- to a 20 year mortgage at around 5% in 2003. Could I have refi’d lower, I guess, but I just stuck with paying extra as much as I could. I don’t mean to sound like I’m bragging – I’m just saying paying down the principal pays off long term. Not sure if you can do this with student loans and in your situation. Good luck. Pay it down!

The idea is don’t pay off a loan if you are good enough an investor to make more than the interest of that loan. 2.65% is low. I understand the psychology behind paying off loans – I paid off my house. But people obsess over Balance Sheet vs Income Statement. It’s the after tax inflation adjusted free cash flows that matter. That’s what matters in retirement for sure.

The Balance Sheet vs Income Statement bias manifests when people choose to be house rich but no way to generate cash in retirement.

But it’s not just the comparison of the loan % vs. what you can make by investing. By making only the minimum payment (like on a credit card), it adds to the principal. I think that’s why some students complain that they took out $60K in loans and now it’s $100k. What else makes the loan total go up, except by not paying the amount needed each month?

I understand your concern. But being in debt isn’t a bad thing if the debt is “productive”… if you can invest money and get more than 2.65% (after-tax) then the rational decision is to not pay the debt off. Having said that you might take a loss, over a period of years, when your investment does not make 2.65%. But it’s a no-brainer if it’s stocks and bonds over a long period of time, like greater than 10 years (the Couch Potato below has not been underwater for more than 39 months since 1987).

Loan interest rate: 2.65%
Investment yield: 8.22% (Scott Burn’s Couch Potato portfolio, long-term results from 1987-Present… 50% US stocks, 50% US bonds). After tax 6.41% (assume 22% marginal tax rate)

Scenario… instead of paying off a $25,000 student loan, invest in the Couch Potato for 20 years. Result:

$61,407 in a taxable account (well… somewhat less, the dividends will be taxed)
$93,766 in an IRA, tax deferred but you have to pay someday


Calculation on HP 10bII+ Financial Calculator using present-value functions.

The correct way to calculate the differential yield interest rate between two rates, like 10% and 5%, is not just subtraction, or 5%.

It’s a ratio, 1.10 / 1.05 = 1.0476 or 4.76%. It’s close to 5% for small numbers, however.

This is where you see how to simulate a 50% stock 50% bond portfolio.

If you master the numbers, you will master many things in life.

Also if someone is encouraging you to refinance a loan, any loan, consider that they may be talking out of self interest. Do they make money on originating the loan, do they collect fees, do they get a bonus or commission? You can always ask, and if asked they have to disclose who they are working for, then you can tell them to kindly drop dead if the refuse to say.

Our society is full of salespeople hoping to influence and get people to do things to benefit them, but maybe not you.

Thank you.