Key Takeaways
- Positive arbitrage is the goal when refinancing federal and private student loan debt.
- There are several federal loan repayment programs that can lower your payments, and if you have a good credit score, you may be able to refinance your private loans, thus reducing those payments as well.
- Refinancing your loans and reducing payments allows you to pay loans off early with the positive arbitrage you gain, as well as pay off other debt or save up more money.
Arbitrage in finance is defined as the simultaneous buying and selling of a security for a profit with a price difference. Positive arbitrage is making money on that deal. We want positive arbitrage when it comes to refinancing federal and student debt.
On the federal side, there are three basic repayment programs available:
All three programs have loan forgiveness after 20-25 years, but there might be some tax consequences.
There is one other repayment program on the federal side, and that’s called the PSLF or Public Student Loan Forgiveness program. It is geared towards specific jobs within the public sector and forgiveness can happen as soon as 10 years and stretch out to 20 years.
These repayment programs aren’t so much a type of refinancing as they are programs that can reduce your overall payments.
In regards to private loans, there are variable rates which are typically higher than federal loans. Let’s say you have a $10,000 loan at 8.5% and you want to refinance this loan. You have a good credit score over 700, and you can get down to 5%. Let’s compare these rates:
The difference is $18 of positive arbitrage. If you make the $124 payment towards the new 5% refinanced loan, your loan is paid off 18 months early which saves you about $1800 of interest. That’s a great deal!
Look to your private loans first to see where you can refinance to reduce that expense. That gives you more money to pay off other loans, or to save up some more money!
Until next time, enjoy.
Gary