Commonly available online calculators are incorrect for those comparing Federal loans (with accumulated interest) to a private loan refinance. As your interest accumulates, your effective interest rate decreases, because you are not getting charged "interest on the interest". This is essentially a government subsidy, which most do not realize they will lose when they refinance. Our calculator takes this into account for a true comparison. 

Use this tool to help you made decisions on how much you might save with refinancing. Enter data in the peach boxes, outputs are in blue. Explanation for the outputs below.

Explanations

Post-Refinance Monthly Payments. This is the new payment amount based on the new loan you are considering.

Effective Interest Rate of Existing Loan. Because Federal student loans don't charge "interest on the interest" which has accumulated, the actual interest rate you are paying on the loan only applies to the principal. This rate adjusts for the fact that part of the money you aren't paying on your loans is in essence a "free loan" from the federal government.

Interest Accumulation Per Year. The actual dollar amounts that each loan costs you. Note that after refinancing you will be forced to make payments which at least partially cover the interest, and thus your annual interest charged will go down each year as the balance decreases. But this would be the same if you paid extra on the principal of the existing student loan.

Change in Annual Cash Flow. This is the annual "cost" of your refinanced loan over your existing loan. This is the amount of money you no longer have to spend or save, which is now going toward the new loan. We like to think about this as the amount of money you no longer have with which to contribute to retirement accounts such as 403s/401ks and (backdoor) Roth IRAs. Those plans have definite tax advantages which are not reflected in this calculator and would be "earned" by contributing this cash flow rather than refinancing. 

Total Annual Refinance Savings. This is the amount you can save by refinancing.

Implications for PSLF

Many people refinance due to fears that PSLF won't apply to them. For example, that they'll one day be in a job not eligible for PSLF. Alternately, some fear that legislation will change and their existing loans will no longer qualify, which is so exceeding unlikely as to be a false fear. They see the interest balance increasing which causes anxiety. In addition, many are exasperated with dealing with Fed Loans, or alternately having to worry about an uncertain future.

Example

In these cases, it's helpful to focus on the Total Savings that refinancing provides. Often, it's not as big as people think.

Take this example: A $250,000 loan at medical school graduation at 6% will have accumulated $75,000 in interest after 5 years. This makes the effective interest rate 4.6%. If one refinances into a 4%, 10-year loan, the annual savings is only $2000. Over 5 more years (when presumably PSLF might happen for them) the total cost from NOT refinancing is $10,000. Thus, the worst-case scenario of expecting PSLF and losing out on it at the last minute is $10,000. 

Now consider the new 4%, 10-year loan. Interest over 10 years is about $70,000, and thus your total costs are $395,000. In contrast (assuming no salary increases), the total payments over the next 5 years on a $250,000 federal student loan balance under an IDR plan (with a reasonable primary care salary of $200,000) is only $135,000. Thus, refinancing costs you $260,000 extra dollars compared to not getting PSLF (e.g. $395,000 in payments from refinancing vs $135,000 if not). And remember that loans are paid back with after tax dollars. At a salary of $200,000, this cost of $265,000 represents about $400,000 in future salary. All of which is going toward your loans.

Here's the take-home point. If there is any chance of PSLF and you GET it, you've saved $400,000 in salary. That's two year's worth of income. If you assume you will get PSLF and DON'T get it, the cost to you over that time is only $10,000 (about $20,000 in salary). Would you bet $20,000 in order to get $400,000? $400,000 is life changing for primary care docs. You could retire 3-5 years earlier. But $20,000? Over the arc of your life you probably won't miss it. This is not even taking into account the extra cash flow you have by staying on an income-driven plan which can be used to increase retirement savings. If you are not maxing out all your retirement accounts, you are essentially leaving government-subsided money on the table. It's difficult to estimate the value of the tax savings, but for many people it far exceeds the modest extra cost from sustaining PSLF-eligibility with Federal loans.

We realize the above example might be hard to follow. Please contact us if there are any questions, or if you'd like (free!) help with your specific situation.