Student loans are downright scary for many people. According to the AAMC the median student debt load for a 2014 medical school graduate is 180K. Throw an interest rate of 6%+ on top and you have a serious obligation on your hands. You must be on your game when preparing to tackle your loans. Planning ahead is essential to a speedy payoff! Here are 3 methods to consider if you have student loans.
#1 Public Service Loan Forgiveness
The PSLF Program is intended to encourage individuals to enter and continue to work full-time in public service jobs. Under this program, borrowers may qualify for forgiveness of the remaining balance of their Direct Loans after they have made 120 qualifying payments on those loans while employed full time by certain public service employers.
In short, it’s a big deal and can equate to massive benefits. Why? It allows you to make the 120 qualifying payments based on your income. The lower your income, the lower your payment. Often, in your first 10 years, you are far from knocking it out of the park income-wise.. especially if you must go through extended training such as residency and/or fellowship programs. No matter how much you paid in, after 120 payments, the remainder is forgiven.
For example, let’s say you’re a 1st year resident planning to become an Interventional Cardiologist. You’re looking at approximately 8 years at $50K per year. Let’s assume you owe $200K in student loans and your income based repayment during training is $200/mo. (Check out this repayment estimator for more info) By year 8, you have paid back around $20k with two years remaining to satisfy PSLF. During your first 2 years in practice and final 2 years of PSLF, you bump to standard payments at $30K/yr. Total repayment at year 10 comes in at $80K for an original $200k in debt. That’s serious savings!
Every scenario is different, so run your numbers. Don’t procrastinate! Every delayed month can equate to thousands of lost dollars. Even if you’re further along in residency or early in practice, it’s not too late. Do your homework or find someone that can help you run your numbers.
Are you on the path PSLF? Enter PSLF maximization. Under PSLF, less payments equate to more forgiveness. Your payment is based in large part on your Adjusted Gross Income (AGI). The lower your AGI, the lower your payments.
Is AGI the same as Income? No! Income for an employee is your income before any deductions. AGI is your income minus any above the line deductions. Here are a few above the line deductions (talk to a tax professional for the full list & further guidance):
- Traditional IRA & 401k Deduction
- Student Loan Interest Deduction
- Tuition and Fee Deduction
- Health Savings Account Deduction
- Moving Expenses
- Self-Employment Tax Deduction
Every dollar you contribute or pay toward above the line deductions lowers your AGI which then allows for lower income based payments. By paying less each month, you reduce your overall net cost (remember this is not how loans normally work). All of a sudden, a Traditional IRA becomes much more appealing. While HSA’s are fantastic as-is, PSLF makes them even better!
This is a new option to consider, and should not be confused with consolidation. Many consider today’s student loan interest rates to be very high given the historically low interest rate environment. Several private lenders have been taking note and believe they can make money on refinancing student debt while still saving the student money.
One such company is SoFi and, as of this writing, their lowest rate for a fixed student loan refinance paid over 10 years is 4.74%. 6% vs. 4.74% makes for potential tens of thousands of dollars in interest savings. How are they making money? They raise money from investors who are happy to get a safe, modest return. They use investor funds to refinance your student loans and charge you interest. The interest is used to operate the business and pay a return to their investors.
If you’re planning to refinance, don’t be too quick to assume the best. These private companies want to make a profit and will do their homework on you. DRB is another company offering to refinance student loans. Reach out to one of these companies now and ask them how they determine interest rates for individuals. Ask them what financials must look like for someone to get their lowest rate. Talk to several companies and don’t procrastinate!
If you are in training (residency, fellowship, etc) refinancing often happen when you transition into practice. As you approach this transition, wait to make big financial moves like buying your dream home or purchasing a practice until you understand your options on student loan refinance. They are likely to set a higher rate of interest if you already owe a ton of money on your big new home, new business, and two new cars. If you wait on these big moves, you may be able to lock into a lower fixed rate for the life of the loan.
When going the refinance route, unlike the PSLF route, the goal here is to pay the debt off as quickly as possible. During training, pay as much as you can each month. When you are ready to refinance, plan your budget to assume you utilize the fastest possible payoff period that makes sense for your income. This will result in considerably lower interest rates and massive interest savings. When you refinance, determine if you want to pay the normal payments each month or pay extra when possible. This should be determined based on your rate and personal circumstances.
#3 Leave As Is
What if option 1 & 2 are off the table for you and your interest rate is 6%+? This is the simplest of all three strategies. Pay off the debt as quickly as possible and keep your eyes open for opportunities to lower your rate. Prepare an aggressive payoff plan and set a specific payoff date to mark on your calendar. Don’t give up on refinance opportunities along the way. Maybe your parents are well off and have conservative dollars available. Consider a private refinance through your parents where they earn a higher interest rate on cash and you save on interest. Maybe you get declined from one of the refinance companies. Ask them why you were declined and what you must do to get the best rate. Set out to become their ideal customer and try again!
Most importantly, make your student loan payoff plan of action now if you haven’t already. Also consider talking with a financial planner that is familiar with student loans. If you are married, make sure your spouse is on board with the plan and get to work together. Winston Churchill said “Let our advance worrying become advance thinking and planning.” Remember, investing in your education is one of the best investments you can make. If you remember this and stick to your plan, you will be just fine!