Having massive student loan debt can be a huge weight on you emotionally and financially. Refinancing student loans is one way to save thousands of dollars in interest. But if your credit is shot and you get rejected from various lenders, it can be discouraging. But that doesn’t mean it’s the end of the road.
Thirty-five-year-old Anna S. went to the New York Medical College and took out more than $375,000 in federal student loans to be a physician. She experienced her fair share of setbacks and rejections trying to conquer her debt.
Read on to learn how one woman was able to rebuild her credit, refinance her loans and have a student loan payoff plan. This is her student loan debt success story.
Anna borrowed a lot for her career, but she deferred her loans until graduation. Within a year of residency, she had secured a job making more than $200,000.
But in addition to her already massive federal student loan amount, she also had $40,000 in private student loans and $25,000 in credit card debt. Her “good salary” was stretched thin among her loans. She had a mortgage payment and was raising a child, paying for childcare and getting the bare necessities.
The weight of debt was too heavy, and between 14 different student loans, it was too much to face. Even with a good salary, she felt like she couldn’t tackle her debt and started skipping payments. But that strategy caught up with her.
“I wasn’t trying to skip payments, but my priorities were with my family and my home first. Not to mention other monthly spending costs of food, etc. My salary – although seemingly high – was not adequate to pay for all,” she explained.
After missing three payments, she realized just how much it was affecting her credit. Her credit score was now at an all-time low of 550. FICO credit scores range from 300 to 850, and 550 is solidly under the “poor” credit score rating, which is the lowest rating.
Coming up with a student loan plan
After her credit tanked, Anna knew she had to get out of denial and face her loans head on. She was left with $374,500 from Great Lakes loans at 7% APR and $10,000 from Navient at 8% APR.
She decided to consolidate her student loans with a Direct Consolidation Loan through Great Lakes and get on an income-driven repayment plan. Anna didn’t get much guidance on which income-driven repayment plan would be a good fit for her and ended up on income-contingent repayment (ICR).
ICR is the worst of all the income-driven repayment plans as it takes the highest percentage of income and has the longest repayment term. Under ICR, borrowers pay 20% of their discretionary income, compared to 10 or 15% on other income-driven plans.
Under ICR, her payments were an astonishing $5,000 per month. Even with a good salary, this wasn’t exactly “affordable.”
“I realized that my ICR payments were either calculated incorrectly or that something was not right because it was unreal that 50% of my earnings were to be allocated to my loans,” she said. “That’s when I called Travis, who told me to consolidate and switch to REPAYE. I did, and my payments went from $5,000 to $860 per month.”
Travis, founder of Student Loan Planner, suggested getting on the Revised Pay As You Earn (REPAYE) plan, which is much more borrower-friendly. Under REPAYE, payments are capped at 10% of discretionary income.
Anna ultimately wanted to refinance. But Travis suggested she get her credit in shape first, as the delinquencies had badly affected her credit.
Refinancing student loans
After getting on REPAYE and lowering her monthly payments, she started paying off more debt.
“That gave me some breathing room that allowed me to get back on track and make on-time payments while also focusing on my high-interest debt first,” she said.
So with the extra cash freed up, in addition to taking on more shifts, she was able to ditch all of her high-interest credit card debt as well as her private loans within a year.
After committing to paying down debt and improving her credit, her credit score improved significantly. Anna was able to get her credit score from 550 to 740. It was at that point she knew she was ready to refinance.
Even though Anna had improved her credit score significantly and paid off a good chunk of debt, there were still some delinquencies on her record. She ended up getting rejected from four different refinancing lenders, including SoFi, Credible, LendKey and Laurel Road.
When learning about her rejections, the common thread among them were those missed payments her on her record.
“The delinquencies from last year’s missed payments haunted me,” she said.
But she was determined to try all of her options. Anna ended up being pre-approved with Earnest for $384,500, which would cover both her Great Lakes loans and Navient Loans, all without a cosigner.
She was also approved by CommonBond for $374,500, which would have only covered her Great Lakes loans and would have required a cosigner.
Anna chose a 15-year term with Earnest and got her interest rate lowered to 5.33% with a monthly payment of $3,140. Going from 7% and 8% to 5.33% made a huge difference given the amount of debt she had.
Student loan debt success story with the refinancing ladder
To combat her debt, Anna plans on working more shifts and employing the refinancing ladder approach she learned from Student Loan Planner.
After making additional payments and being aggressive with her debt, she intends to refinance again after every $100,000 paid off — and secure a better rate with better terms at another lender.
“It was like a lightbulb moment went off with the refinance ladder,” she said.
“I was afraid to refinance because I thought there was a restriction. I was always afraid of getting into a situation where you’re locked in. But knowing that I can improve my rate by refinancing, that was very motivating,” she explained.
Now Anna is on the road to debt freedom. Using the refinance ladder strategy, she now has a plan to get out of debt completely within three to four years. Her credit has improved, and she’s making progress toward her financial goals, writing her own student loan debt success story.