Fixed vs. Variable Rate Loan Refinancing | ELFI Education Loan Finance

The Differences Between Fixed and Variable Rate Loan Refinancing

November 9, 2016

What is the difference between a fixed rate and a variable rate loan?

Which option is best for refinancing a student loan?

When borrowers begin to consider their options regarding refinancing a student loan, one of the most commonly asked and most heavily debated questions revolves around deciding between fixed and variable rate loans. While the details of each loan type are fairly simple, the crux of the debate is centered around what will be right — and best — for you. If you are still undecided, take a look at the following details to help you better understand and choose between a fixed or a variable rate loan.

Fixed Rate Loans

A fixed rate loan is a loan that has an interest rate that does not change over the life of the loan. This means you will pay the same amount in interest each month, but it also means you will know exactly how much interest that you will pay over the life of the loan.

Variable Rate Loans

Variable rate loans, on the other hand, have an interest rate that will fluctuate during the term of your loan. These fluctuations are directly linked to changes in common financial indexes, such as the LIBOR index, typically by adding the current index amount to a fixed margin defined by the lender to determine the current rate. Compared to fixed rate loans, variable rate loans tend to have lower starting interest rates for the same term, but this can change (and increase) after your loan closes. However, most lending institutions, including Education Loan Finance, put an interest rate cap on variable rate student loans. For example, Education Loan Finance caps its variable rates at 9.95 percent on 5, 7, 10, 15, or 20-year variable rate loans. This means that no matter how high the LIBOR rate may increase, you will never pay more than 9.95 percent interest, if you choose a variable rate refinanced student loan through Education Loan Finance.

What Is Your Best Option?

Fixed rate loans tend to be best for borrowers who want to know exactly how much they will be paying over the life of their loan, but they may also be best for borrowers who:

Want a consistent payment.
Are on a tight budget.
Want to eliminate any risk of interest rate changes during their repayment period.

Variable rate loans, conversely, may be best for borrowers who:

Are looking for the greatest savings potential.
Have a flexible budget, should interest rates rise.
Plan to pay back their loan in a shorter amount of time.

Deciding between fixed and variable rate loans on a refinanced student loan, therefore, ultimately depends on what is best for you, your budget, and your personal situation. Plus, you always have the option to refinance your student loan from fixed to variable and vice versa. For instance, if you choose a variable rate loan and you are concerned that rates will continue to climb to a rate with which you are not comfortable during your repayment term, you always have the option to consider refinancing to a fixed rate at no cost to you. Have any more questions? Contact us or give us a call at 1-844-601-ELFI (3534).

Scenario 1 - Paying Down Debt Student Loans Then Investing

Let’s start off by taking a look at how you can pay this debt down faster. Did you know that if you pay an extra $100 a month in addition to your regular student loan monthly payment, you’ll save $4,464.13 in interest paid? Not only will you save money by paying extra every month, but you’ll cut down the overall repayment period by a year and a half. Yes, you’ll be debt-free a year and a half earlier than you thought! $812.76 + $100 = $912.76 Monthly Payment After being debt free sooner than expected, you may decide to start investing in your 401(k). If you put all of the money you were paying from your student loan into your 401(k), you’d contribute $1,094.31 monthly. You may be wondering how you can contribute more money towards your 401(k) than your student loan payment. The answer lies in taxes. Student loan payments are made with post-tax income. 401(k) contributions are made with pre-tax income. Since a traditional 401(k) account uses pre-tax income, you are able to contribute more towards your 401(k) than you would have your student loan debt with the same income. Though you don’t pay taxes on 401(k) contributions, ordinary income tax will be applied on 401(k) distributions. $912.76 / (1-16.59%) = $1.094.31 Monthly Contribution After a year and half of contributing $1,094.31 per month, compounded monthly, at an assumed 7% rate of return, you would have $20,826.09. The investment amount of $20,826.09 combined with the student loan interest savings of $4,464.13 would give you a total 10-year net value of $25,290.23.

Scenario 2 - Investing While Paying Down Student Loan Debt

If you have a higher priority of saving for retirement than paying off your student loan debt, you may want a different option. Let’s see what would happen if you decided to put that extra $100 a month into a tax-deferred 401(k) account. The $100 would be contributed to your 401(k) account instead of your student loan debt balance, but you would continue to make monthly student loan debt payments. Due to the pre-tax nature of a 401(k), your contribution of $100 post-tax would become $119.89 pre-tax. $100 / (1-16.59%) = $119.89 Monthly Contribution With an assumed 7% rate of return, compounded monthly, on your 401(k), you will have approximately $20,872.19 in your 401(k) after 10 years.

Scenario 3 - Employer Contributions 401(k)

Some employers will match your 401(k) contributions up to a certain percentage of your income. This could be a real game-changer. Turning down your employer’s 401(k) match is like throwing away free money. If you have student loan debt, but your employer offers a match, consider contributing to receive the maximum employer match. If you contribute $119.89 a month with an employer match while making your normal student loan payments, your money can really grow. If your employer matches the 401(k) contribution dollar for dollar, you will double your investment of $20,872.19 from Scenario 2 to $41,744.37 in your 401(k) account after 10 years. Contributions to a traditional 401(k) are made prior to your income being taxed. The withdrawals on a traditional 401(k) are taxed. The tax rate that is applied to your withdrawals depends on your tax bracket in retirement. As the average person’s career develops, they typically continue to increase their salary and move into a higher tax bracket. Upon retirement, they will see a decrease in income and move to a lower tax bracket. This means your 401(k) withdrawals could be taxed in a lower tax bracket if done while in retirement, instead of in your working years. Note that this will only be the case if your retirement income is less than your working income.

Scenario 1 – Paying Down Then Investing

Scenario 2 – Investing While Paying Down Debt

Scenario 3 – Employer Contribution 401k

As you can see from the chart above, investing while paying down student loan debt or paying down debt than investing produces almost the same total net value. One debt pays down and investment strategy might perform better than the other depending on the return in the 401(k) account. It’s important to keep in mind that the returns on a 401(k) account are never guaranteed The real deciding factor on whether to invest or pay down your student loan debt will be if an employer offers a 401(k) match. Matching contributions from your employer will make investing significantly more attractive than paying down debt. If an employer match to your 401(k) is available, it’s wise to take advantage of it. Your comfort level with your student loan debt can be a large factor in your decision to invest in a traditional 401(k) account or to pay down debt. Knowing whether you are more interested in being debt free or being prepared for retirement can help you make a decision. Let’s look at how student loan refinancing can help you amplify your student loan debt pay down and investment strategy. In Scenarios 1, 2, and 3, the big question was whether you should use the additional $100 a month to pay down student loan debt or invest in a 401(k). What if you wanted to spend that $100 a month instead? Is it possible to find a way to save on student loan debt while spending that extra $100 a month? You’re in luck! This can be done with student loan refinancing.

Scenario 4 - Refinancing Student Loan Debt

By refinancing your student loan debt, you should be able to decrease the high-interest rate of your student loan. In addition, you should be able to save money over the life of the loan and in some cases monthly. The total interest you would have to pay on your student loans of $70,000 at 7% interest over 10 years is $27,531.12. If you qualify to refinance your student loan debt to a 5% interest rate, the total interest you would pay is $19,095.03. This would mean that refinancing your student loans would be saving you $8,436.09 in interest over the life of the loan or $70.30 a month. When comparing your new 5% interest rate to your previous interest rate of 7%, not only would you be saving over the life of the loan, but reducing your monthly payment! $8,436.09 / 120 = $70.30 Monthly Interest Savings

Learn More About Student Loan Refinancing

Scenario 5 - Refinancing and Paying Down Debt Then Investing

Now, what happens if you refinance your student loan debt, pay down the debt, and then start investing? Refinancing your student loan debt will cut your interest rate, saving you $70.30 a month, making your monthly student loan payment now $742.46 instead of $812.76 per month. By taking the additional $100 a month and the $70.30 in student loan savings from refinancing and applying them to your monthly student loan payment, you will be debt free two years and three months sooner than expected. Two years and three months are earlier compared to the one and a half years from Scenario 1. Just a reminder, in Scenario 1, there an additional $100 a month put towards your student loan debt. With refinancing and making the same monthly payment as Scenario 1, you will save $13,017.87 in interest over your original loan. $742.46 + $70.30 + $100 = $912.76 Monthly Payment Now that you’re debt free, you can use the money that would have been used for your student loan payment to contribute to your 401(k). Since 401(k) contributions are done with pre-tax income, you will be able to contribute a pre-tax amount of $912.76, which is $1094.31. $912.76 / (1-16.59%) = $1.094.31 Monthly Contribution After two years and three months of contributing $1,094.31 per month, compounded monthly, at an assumed 7% rate of return, you would have $32,085.89. The investment amount of $32,085.09 combined with the student loan interest savings of $13,017.87 would give you a total 10-year net value of $45,103.76.

Scenario 6 - Refinancing and Investing While Paying Down Debt

Now let’s try refinancing while you simultaneously pay down debt and invest. In this scenario, you will cut down the interest rate on your student loan debt from 7% to 5% by refinancing. You’ll be contributing the pre-tax amount of the extra $100 a month and $70.30 a month in interest savings towards your 401(k). You will end up contributing a total of $204.17 a month to your 401(k) account. ($100 + $70.30) / (1-16.59%) = $204.17 Monthly Contribution With an assumed 7% rate of return, compounded monthly, you will have approximately $35,544.87 in your 401(k) after 10 years. Combined with the interest savings of $8,436.09, you will have a total net value of $43,980.96.

Scenario 1 – Paying Down Then Investing Scenario 2 – Investing While Paying Down Debt Scenario 4 – Refinancing Student Loan Debt Scenario 5 – Refinancing and Paying Down Debt Then Investing Scenario 6 – Refinancing and Investing While Paying Down Debt As you can see from the chart above, just from refinancing your student loan debt, you can save money and increase your total net value. If you take it one step further and supplement your debt pay down and investment strategy with student loan refinancing, you would approximately double your total net value! By taking advantage of student loan refinancing, you will be able to supercharge your debt pay down and investment strategy. For those who are just trying to save money on student loans or have more money to invest in their 401(k), student loan refinancing is the way to go.

Check Out Our Guide to Student Loan Refinancing

NOTICE: Education Loan Finance by SouthEast Bank is not authorized to provide tax advice or financial advice. If you need tax advice or financial advice contacts a professional. All statements regarding 401(k) contributions assume that you have a 401(k) plan and that you are able to contribute those amounts without contributing more than the current federal law limits. Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.

2019-04-04

How To Find The Best College For You

Picking the right college for you is quite a task. There are so many to choose from! Plus, with the birth of digital experiences, vlogs, and just plain slick marketing materials, it can be a challenge to determine what matters when making such a big decision. It’s important throughout the college search process to remember the main goal which is getting an education. It can be easy to become distracted by the brand new apartments on campus and the conveniences that the college offers. Yes, it’s important to be comfortable while attending school, but it’s not worth losing out on education. How do you find the right college for you? Here are some things that you should take into consideration. Not every aspect will matter to you, but it’s nice to think about big-picture options.

Major Malfunctions

The major that you’re interested in studying and how the college meets the major’s needs could be a huge deciding factor. For example, does the college have a good reputation, appropriate resources, and a notable department? Really take into consideration what the school’s reputation for the program. Is your major available and are there classes that will challenge and engage you? Is the reputation of the college’s program going to further your career upon graduating? Most people know their preferred major or industry before starting, but it’s common for college students to change majors. Does the school have a few appealing options for you? Get in touch with an advisor or the head of the department of your choice and see how you can find out more. You are attending college to further your education and get a career, so if that program isn’t available that could be deal-breaker.

Location, Location, Location

Have you always wanted to live on the east coast, dreaming of the mountains, or would you prefer to stay closer to home? Being close by to your family and paying lower in-state tuition could be great options for you. A school in the city could be a better option since you’ll have the ability to take in everything that urban life has to offer. From expansive green grounds to bustling urban towers, there are so many different types of locations you could pick. Don’t rule anything out too soon. You might be surprised how friendly a university in the city can be, or how lively you’ll find a more rural campus. When selecting a school it’s important that you consider the distance from your home. Many people often times will want to be available to go home on some weekends or for big events. What the cost is to go home? Can you take public transportation, can you have a car on campus your first year, can a friend or parent pick you up, if needed? A primary consideration for location is the cost. In-state-schools provide a much lower cost to attend than an out-of-state school. If you know you’ll need to borrow student loans for college it may be best to stay with an in-state-school. Paying to attend an out-of-state school will mean more money you’ll have to borrow and eventually pay back. Your decision on school location should be influenced by your comfortability level with being away from home and the cost associated with the location.

Tally Total Cost

Cost is a huge factor in selecting a college. Fees aren’t only limited to tuition but can be dependent on the school. One school may have lower tuition, but fees like room and board, off-campus housing, meal plans, or transportation. We touched on this previously but, if you opt for a school that’s farther from home, how much will you spend coming home to visit? If you really want to go far away from home you may need to factor in the cost of airfare to visit home. Plus, look into fees like a parking permit and departmental fees. It’s worth doing a little math to see what the total cost is before you get your heart set on one or another.

Finding Financial Aid

If you can qualify for financial aid and are being provided with financial aid from a college that should heavily impact your decision. Can you get more aid at one school vs. another? Are there more scholarship options available through one college over another? Does staying in-state offer enough benefits that you don’t want to leave? There’s nothing wrong with picking a school because it will offer you the most aid. Aid is especially important if you are borrowing money to attend college. Even if the school doesn’t check all of your other boxes for wants, the cost savings could help make it a front-runner. Make sure you check into scholarships and applications for aid before you make your decision.

What You Need to Know About Scholarships for College

Culture Shock

Schools usually have a discernible culture that students or faculty can feel and describe. For instance, a school with a robust exchange student program might be more inclusive and have a culture that appreciates diverse perspectives. Another school might be steeped in tradition and fit better for someone with traditional values. Schools with bigger arts programs or specialties in STEM could have a culture all their own. You really can’t get a good depiction of the culture from marketing materials. Understanding a school’s culture is the kind of thing you can ask while visiting or inquire about online in places like forums or Reddit.

Sweet Student Life

You will be spending a lot of time on campus. Even if you are non-traditional or live off campus. You should take advantage of entertainment, attending special activities, and participating in one or more organizations. Maybe you want a certain Greek life experience—check into it! Ask around and see what the reputation of campus life is like. Look at upcoming events and see what types of organizations you can join. It can be difficult the first year to make friends and get connected into a social group. Well-supported campus life can make this big task a breeze and set you up for some awesome lifelong friendships and memorable experiences.

All About Amenities

Relatively little things can make a big difference—especially if you’re between a few schools or have close contenders. Think about recreation and facilities on campus, what their sports, athletics programs or teams are like. Does the school have a special connection to a family member or your culture? Small things like cafes that better serve your dietary needs or campus dining options that stand above the rest can weigh into your decision. Your decision should not be based solely on these relatively small things, but if you’re on the fence of two universities it could be what gives you the push needed. It’s important to understand how you’ll be financing college before you start looking at the school. If you plan on financing college by taking out student loans, they can impact your future. Once you understand your finances, you’ll be able to prioritize what is most important to you and start there. Remember too that schools usually have lots of opportunities for you to visit and learn more. There are entire departments of people whose job it is to acquaint you with the campus and community. Don’t be afraid to reach out and ask questions. Go in person and get a feel for the school if you can. Don’t forget to connect with potential faculty for your preferred major. You’ll probably learn a lot about what life would be like as a student, which will help make your decision much easier. Happy school hunting!

Lower College Costs with These Jobs

2019-03-29

Silly Tax Stories and Strange Tax Deductions You Should Know

Tax time is here and hopefully, you’ve already filed. We also hope you don’t run into any of these wacky tax situations! Make sure you get expert help filing if you don’t know what you’re doing. No one wants to mess with the IRS, and you want to maximize the amount you can get back or keep for your financial goals.

Clean eating isn’t deductible, no matter how healthy.

You can’t deduct money you spend on a healthy diet as a medical expense. John Kane, CPA, reported at Credit.com that a client tried to deduct the cost of the family’s foods. Sure, the groceries were non-processed and healthy, but that doesn’t make them count as a medical expense. Sorry!

Negative numbers don’t count.

Some people have tried to use negative numbers on their tax return, maybe innocently thinking that’s what you’re supposed to do. But according to the IRS, you’re supposed to use “0” in any instance where you have a negative amount.

What is a “Good” Credit Score Anyway?

Go old school with pen and paper.

Many millennials live abroad or would like to in the near future. Did you know that you may not be able to file electronically if you are a US citizen and live outside of the country? Expats may find that they have to fill out the long forms because electronic forms require a US address.

Buying a business? Hire a tax expert.

It’s super important to have the right experts and legal help on your side when you’re starting a business endeavor. One reason is successor liability. There are certain business debts or payments that you might not be responsible for, but back taxes don’t go away so easily. People can get burned by IRS liens if they don’t check to see what kind of taxes the business owes.

What kind of employee are you? It matters—a lot!

Some businesses wrongly categorize their employees as independent contractors. In the case of a youth soccer association, they got in trouble with the IRS for requiring the referees to file as independent contractors. Businesses that aren’t following labor laws when it comes to tax filing could face big fines.

Don’t try to hide from the IRS.

Just as a general tip, don’t try to dodge or outsmart the IRS. That’s a really bad idea. The IRS can go into your bank accounts with a levy if you owe taxes for long enough, so there’s no point in trying to hide. Working with them ASAP when you realize that you owe taxes is your best bet. You can probably set up payments, but only if you are on the ball.

Wondering about some of the wackier tax deductions? There are plenty!

Moving for work? Your expenses could be tax deductible, including moving Fido. Don’t forget to keep track of expenses for moving your pets. When it comes time to list dependents, stick to human dependents only. People have tried to deduct pets, but that’s a no-go!
If you’ve got a guard dog for your business, on the other hand, Cujo’s upkeep would be a tax-deductible business expense. If you are trying to deduct the miniature guard dog that protects your house, you’re out of luck.
Pools can increase your homeowner’s insurance and cost a pretty penny to maintain. Did you know that having a medical condition that’s helped by swimming or water therapy could mean your pool expenses are tax deductible?
You may not be able to deduct your grocery costs because you like clean eating. You may be in luck if you’re working with a doctor to do things like lower your cholesterol and BMI. If you’re making adjustments as part of a health plan, there might be ways to deduct some of those costs. Check with your tax pro!
Just FYI, you’re supposed to pay taxes on income even if it was attained as part of a crime or doing something illegal. Not that we’re making any accusations!
Trying to kick the habit? Supplies you use to quit smoking can be tax deductible, too. Just another reason to quit!

6 Ways to Use Your Federal Tax Return

NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.