I write from time to time about options available for refinancing student loans. This was an important development when it first showed up because not only had student loan rates gone up dramatically from the time I graduated from medical school (my classmates refinanced their loans at 1-2% upon graduation in 2003,) but nobody had been offering any significant opportunity to refinance for 5 or 6 years presumably due to the more stringent underwriting guidelines that came about as a result of the Global Financial Crisis. Since that time, three main companies (Common Bond, Darien Rowayton Bank, and Social Finance) have really stepped up in an attempt to refinance the student loans of high income professionals like doctors and lawyers. (By way of disclosure, all three of them are advertisers on this site, either by directly paying for ads or through an affiliate agreement.) Although there have been complaints from readers about the time and hassle it takes to get their loans refinanced, especially in the beginning while these companies worked through the kinks, many WCI readers have saved thousands of dollars as a result of refinancing their loans.
Interestingly, I have heard even more complaints from people who didn't qualify to have their loans refinanced due to a relatively bad debt to income ratio. As a general rule, none of these companies are going to refinance a resident with $300K in student loans until he has an attending level income. An attending with a salary of $150K and $450K in student loans probably isn't going to qualify either. Interesting that the government will loan you as much as you want, but anybody who actually expects to make a profit from it still has very definite guidelines.
A New Option
This Fall, Common Bond added an additional option. Like the other companies, it offers both fixed and variable rate loans for periods of 5, 10, 15, and 20 years. However, it has a new option, which basically functions like a 5/1 ARM mortgage you may have used to purchase a house. The rate is fixed for the first 5 years, then variable for the five years after that. What's the benefit? The benefit is a lower rate than you would get with a 10 year fixed option, but a lower payment than you would get with a 5 year fixed option. Here's how the rates stack up as of December 8, 2014 when I wrote this:
| Loan | Rates |
| 5 Year Fixed | 3.89-5.99% |
| 5 Year Variable | 2.66-5.28% |
| 10 Year Fixed | 4.74-6.49% |
| 10 Year Variable | 3.40-5.28% |
| Hybrid | 3.97-5.83% |
As you can see, the rates are almost exactly the same as a 5 year fixed loan. But the payments, since the loan is amortized over 10 years instead of 5, are about 45% smaller.
Should I Take the Hybrid Loan?
So, that leaves the question, should you use this new loan product? There is obviously some risk, since rates possibly could go up dramatically over the next few years, and your payments (and the total interest you pay) could jump sharply. That has to be weighed against the lower monthly payments. But this all ignores the most important factor in my mind, which is this:
DO YOU REALLY WANT TO STILL HAVE STUDENT LOANS 10 YEARS OUT OF RESIDENCY?
Now, I never really had student loans. I chose to owe time to the military rather than money to the government or a bank. All that time (and a tiny sum of money from my freshman year in college) was paid back at just under four years out of residency. Indeed, I recommend to every graduating resident that he aim to have his student loans paid off within 2-5 years of residency graduation by continuing to live a lifestyle very similar to his residency lifestyle until the loans are gone. (Remember the whole “Live Like A Resident” mantra?) Where has that gotten me? I'm now 8 1/2 years out of residency. I've been a millionaire for a year. My fancy-pants house is half paid off and if I really kept the pedal to the metal and accepted a reasonable lifestyle for the rest of my life, I could retire in 5 years. I probably won't, since I still love both of my jobs, and frankly I'd rather spend more money than retire that early, but my point is 10 years is a heck of a long time to drag out your student loans.
Fixed vs Variable
The only real student loan dilemmas I think WCI readers should be dealing with are:
- Whether to go for PSLF/PAYE forgiveness or to pay back the loans (those working for 501(c)3s should go for PSLF, relatively low earners with relatively high student loan debt not working at 501(c)3s should go for PAYE forgiveness, everyone else should pay off their loans ASAP)
- Whether to use a fixed or variable rate loan (I think running the interest rate risk yourself is probably worth it for someone who will have their loans paid off in less than 5 years.)
Since I think doctors planning to pay off their loans ought to have them paid off in 5 years or less, I see little reason to take out a 10 year loan of any kind, be it fixed, variable or hybrid. It's nothing against Common Bond for offering it. There probably are lots of people who want this type of loan product. There are obviously people who want a 20 year fixed loan or they wouldn't be offering it (those people might be financial idiots, by the way, since they could just do PAYE and have the remainder of the loan forgiven after 20 years.)
One Possible Use
The only person I could see using this loan is someone who plans to have their loans paid off in 5 years, doesn't want to run the interest rate risk of a variable loan for those 5 years, but wants a back-up option just in case something goes wrong. This is the same thing some people do by taking out a 30 year mortgage and then making payments like it's a 15 year mortgage. It costs them a little more money, but it does give them options.
What do you think? Have you used Common Bond for student loan refinancing? Do you see a role for 10 year student loan refinancing options? Of Common Bond's options, which would you choose- Fixed, Variable, or Hybrid? Comment below!
Would you still advise paying off the entire loan balance quickly if your fixed rate is very low? We owe about 36k at 1.78%. Unfortunately we get no deduction for the interest payments. What is the benefit of paying it all now versus making the monthly payments for the next 20 years? Thanks.
I’ve written about student loans vs investing- https://www.whitecoatinvestor.com/student-loans-vs-investing/
Paying off 1.78% isn’t a bad thing to do, but it might not be the best thing for you to do. It depends on what the rest of your finances look like and how comfortable you are investing on margin.
I did a 10 year refinance with DRB which I plan to pay off in about 5 years. The small difference in interest rate is well worth the option to free up a couple grand per month in case of unexpected expenses.
“Since I think doctors planning to pay off their loans ought to have them paid off in 5 years or less”
PSLF takes at least 10 years to achieve post-medical school. Most residencies are 3-5 years. Probably will take most at least 5 years to get to their 10 years of PSLF; so 5 years or less seems a little too optimistic, agree?
5 years out of residency, not med school. But if someone is going to take a job that qualifies for PSLF, they should pay as little as possible on their debts and certainly shouldn’t refinance them.
Unlike you, we have high loan debt. We do “live like residents”. We keep a strict budget, we don’t do any frills, etc. Our cars are modest (2003 Kia, 2006 Honda Civic), we don’t dine out or go to movies often. However, our student loan debt is so high we can’t pay it off in 2-5 years. We are on a 15yr fixed now with DRB (we refinanced down to 5.75% from a mix of loans with some as high as 8+% and paying over a course of 25 years). We are finishing up some other loans so we are going to apply that money to the DRB loan and we should shave about 4 yrs that way. But, it is nearly impossible to pay back $240K (current principle) in 2-5 yrs. For that reason, we are went with fixed loans. If our loans were more manageable, and we could get out of debt in 5 years, we’d probably risk the ARM and hope interest is still low, or low enough that we are better off with the ARM than with the fixed. I like the Hybrid option for people with less debt. For those will lots of debt like us, the safest way is the fixed rate
First, you’re doing great. Shave off 4 years here and 4 years there and that time really adds up. The more aggressive you get, the faster things start to snowball.
Second, I totally disagree that it’s impossible to pay back $240K in 2-5 years. I don’t know what “living like residents” means to you, but to me it means living on a salary of something like $40K (remember residents should be saving money and paying taxes too.) So, let’s say you’re the average doc making $200K. You’re paying $50K in taxes. You’re living on $40K. That leaves $110K per year to put toward debts. Even if you decide to put $30K into retirement accounts, that’s still $80K a year toward the debt. $240K/$80K = 3 years. Maybe 4 with interest.
Personally, I’d tell myself and my family that we’re going to go hog wild for 2 years on this debt, then loosen things up a bit and enjoy the money. I’d do a little moonlighting, pick up a few extra shifts/calls, avoid any vacations, cars, houses I couldn’t afford as a resident, and knock it out. Not only does that ensure you’ll get out of debt a lot faster, but it also allows you to take risks like an ARM loan.
With the job we bought a house, and aren’t moving again. We have a stay at home parent, a toddler, and a salaried doctor. We keep a strict record of monthly income/outflow. After taxes, take home ranges from 11-12K a month. The student loans, car loan, mortgage, insurance premiums (including life, umbrella, and soon to add disability), utilities (and we use cell for work and get that as a business expense– we also have “dumb phones” and a family plan– we pay $44/month for the phones and text), we go from being in the hole by a couple hundred to $3000 in the black per month. But we live across country from family, so we still travel 1-2x a year. We completely hear where you are coming from. We max out our 529s for our son (we feel that is a worthwhile investment, particularly given Iowa tax breaks). I understand that there is debate about student loans first or 529 first. We have our emergency fund built up now, and will be putting some extra towards investment accounts. Assuming a conservative annualized return of 6% a year long term, that is an improvement over the 5.75% we are paying off now. However, to help shave the time off, we are paying the extra payments into student loans. So do we live on $40K a year? Depends on how you define it. The loans and mortgage are more than that. Insurance and utilities cut into it. Groceries– for our family of 3 we pay $300 a month. We don’t do the splurges. And we will be buying into the practice, so that will be more we pay out each month. We make it work 🙂
We also did an hourly plan with a financial advisor to see where the best of action was
You do not live like residents. Residents don’t spend 11-12K a month or 132-144K/year. You chose to buy a new house in what appears to be a high cost of living area or a house that is way too expensive compared to your current wealth and income. Then, you chose to finance cars. If all that cuts into your ability to pay off your school loans sooner, it is that choice which keeps you in debt. If you can’t live and save comfortably on 140K/yr per year well maybe you need to think about the choices you have made in your life. Maybe it is worth making a few changes.
lastly, I hope, truly hope you are maxing out your pretax retirement savings before maxing out the 529. If not you are choosing a state tax deduction over a federal and state tax deduction and this a big financial mistake. As nice as it may be to pay for your kids college, it is meaningless if you can’t eventually retire yourself. You need to take care of your own retirement first before you even start thinking about your kids school debt.
The choice to finance a car was not ability to pay, but rather mix the type of credit to increase credit score for the mortgage (note the cars aren’t flashy, we went for economy and safety with the Honda. We got the Honda in 2012 after my 1996 Corsica bit the dust). We bought a house when we moved to join a practice. It is NOT a high cost of living area, but rather much lower. We did go big (more than I would have liked, but we decided we’d tighten the belt and get it) because we don’t want to move again and we plan on being here and with the practice for 35 years. We have a child and plan on 1 more in the future. We will grow into the home. We made the decision to buy over rent because it IS more cost efficient. We bought too big to grow into, but we knew we could make payments to finance based on what is coming in.
We actually hired a fee-only hourly financial advisor to make sure we were on the right track this year, and make decisions about retirement. We are not eligible for retirement until 2 years into the practice. It is NOT a 401(k), we get no match. But we WILL be maxing out the retirement as soon as we are able to contribute (2yr anniversary is August 2015, retirement can start November 2015). The ONLY thing we did different than in residency– we bought a house. Period.
The financial advisor said we are in great shape and found ways for us to contribute more to the loans. But we don’t want to overpay the loans when investments are more. I realize our situation is different than most. I was responding to the initial question of ARM/Hybrid/Fixed. For our situation we went fixed. I do like the Hybrid and ARM for smaller loans.
When you say live like a resident, that means no extravagances. The house, while maybe extravagant by comparison standards is economical in long run and also fits stress. As a resident you will be moving soon too. It doesn’t make sense to buy. Once you know where you will establish, a home is more economical than renting. So we bought. If we were to buy the home where I grew up on the east coast, we’d have had to pay 4x the amount. We coupon shop and stock. Like I said, we spend about $300/month on groceries for a family of 3. And that includes buying lots of higher cost healthier foods like fruits and vegetables. My sister and her husband, for example spend about 500 for the two of them. The only movies we went to were when we were gifted movie passes. We don’t buy the $8 popcorn. We don’t own a boat or other recreational craft. The only travel we do is to family… a couple 600mile drive round trips a year and 1 flight a year. We went to a couple museums and we always use Groupons saving over 60% a trip. We take care of our child (free library time, $15 for 5 week sensory class, play at home) and work. That’s pretty much it.
I’m sorry for being defensive. I know it’s silly but I feel the need to explain. Our debts ballooned when we were on income contingent repayment. We did pay all the interest and some principle most of the time. Then on the THIRD student loan transfer, we couldn’t pay extra money online (student loan companies selling to each other, we had no say in it). So we paid what we could, but interest built. Then we moved it on our own so we could at least cover interest and pay more down.
I wouldn’t feel a need to defend your decisions. You both are making excellent points that others can learn from. You admittedly “went big” on the house for convenience as well as hopes of saving money in the future. You also bought cars you could not afford in that you had to finance them. (That bit about credit scores is kind of silly BTW.) Those things will slow you down a bit financially than if you had bought a 10 year old car with cash and stayed in a 2 bedroom apartment for a couple years. Can you still do fine? Sure. Are you going to be debt free just as quickly? Nope. But moderation in all things.
No, we could afford the car. We CHOSE to finance in order to add types of credit to raise our credit score and build a bigger and more diverse history prior to mortgage hunting. We COULD HAVE paid for the car in full. (Our credit reports all said one big negative factor was not enough diversified credit… another was age which we can’t do anything about)
We also weighed the idea with the mortgage rates. We made a few deadlines. We got in when interest was very low. We got an FHA loan so we didn’t need 20% down, and we made it by ONE week to be able to be PMI free. All FHA loans now require PMI full term. I personally believe the economy will be much better in a few years. Therefore interest rates will be higher. We’re actually saving money by buying when we did by getting a home with less than 20% down that we can grow into and be PMI free and have very low interest payments. The mental health of not renting and having one thing down is worth the cost. We aren’t the average family or average physician family (such as yourself, Dr. Dahle) where financial advisors shudder because doctors are so bad with their money. We did a huge vetting process and discovery interviews over several months with different FEE ONLY financial advisors. They all said they were impressed with what we do/know (obviously investing isn’t part of it and WCI is a tremendous help and tool). The advisor we paid said we have made few mistakes and are doing well.
You chose to live poor for 5 years and then live well. That’s fine. We didn’t want to do that (and I only refer to the house, we are quite frugal on everything else). We felt the timing was right with interest rates and we went for mental health to never move again. Residency and medical school brought several moves. We were happy to settle. Different decisions for different people. Each person does what is right for them 🙂
Adam,
We all make choices we need to live with, and sorry for jumping down your throat. Reality is, you choose where and how you spend your money. As long as you end up where you want to be, who cares how you choose to get there. Realistically most physicians would not even think about savings, and just think about what they could afford today. I make X amount of money, what is the maximum payments I can afford. By those means you are way ahead of the game.
One of the reasons I hate debt so much is because no one knows what our reimbursement would be in the future. CMS can cut our pay by 30% over the next few years, and if we are living paycheck to paycheck now, we are then forced to change our life or declare bankruptcy. That is scary stuff. Which is why it is better to have lower fixed expenses. it is much easier to adapt.
I know physicians who practiced 20-30 years ago who all of a sudden saw their compensation drop by 40% in just a few short years. All of a sudden they are living way above their means. Just ask the old cardiothoracic surgeons. Or talk to the interventional cardiologist today who are seeing their reimbursement cut.
Will a similar scenario happen to us? I really hope not. But the conversation about healthcare will continue in the US and who knows what the future will bring.
Disclaimer: Although I still have a mortgage and school loans, I do pay them off a little faster than the minimum payments despite all being under 3%
I agree and wish you the best. There are many roads to Dublin and minimizing the amount of time to financial independence is not nearly as important to some physicians as to others, nor should it be.
I’m glad the house purchase worked out great for you. I had a realtor drop off some recent sales in my area and found that my home has appreciated something between 13 and 27% over the last four years since I bought it. Even if I had to take out a 0% down loan at a high rate that would have worked out well. As it is, I own nearly 50% of the house already. Sometimes luck/skill/timing matters more than getting the very best deal on a mortgage.
I’m really genuinely curious about the whole credit score thing. I’ve never had a score that was so low that I couldn’t get the best rate available on a loan, and I’ve never spent any time monkeying around trying to get it higher. I just pay my bills. Was your score so low that you couldn’t get that? What was it that got it so low that you had to finance a car to get it high enough to get a mortgage? Was there no other way to get it higher?
Adam, How much is the mortgage on the house?
Sure, we all have to make decisions. The important thing is to make them consciously. If you’re consciously choosing a 10 year repayment plan in order to live a little differently over 10 years, instead of a rapid repayment plan and living really poorly for a couple of years, then quite a bit better for 8, that’s entirely your choice.
Personally, I’d pay off my own student loans before paying off my kid’s, but it sounds like you’ve got a good handle on all this to me.
This is the age old boglehead question: Pay off loans or invest?
Mathematically it is a no brainer to hold off paying off those low interest rate as long as you take that extra money and invest it.
On the other hand psychologically not having any debt I hear is just a wonderful feeling. I think when retired that feeling is very important to sleep well at night, but since I am not planning on retiring just yet, I can take on that bit of risk on paying off those low interest rate loans just a little slower. Also, many people describe debt as an inverse bond. In a bond you are offering credit to someone else and are given a rate of return. Personal debt is the exact opposite.
For example:
If you have 400K in investible assets in a 75/25 asset allocation, but also have $100K in low interest rate debt. Then by the thinking above you are actually 100% equities. Think about it. Your bonds are paying off ~2% while your debt is ~2% they are canceling each other out.
I exclude a home mortgage from this figure as a primary residence is not an investment but an expense. No matter what you will always need a home to live in.
The way I handle my low interest rate debt:
1) First and foremost I maximize all my tax advantaged accounts.
2) Next I calculate how much I need to save in a taxable account at 5% real return to get to my goal at a certain age, and invest that.
3) Continue to live below my means.
4) Any extra cash left over every quarter I split up between taxable investing and paying off my debt. I would like my debt to go away faster, but definitely not in the 5 years recommended. I even have >$100K at 1.5% fixed. At regular payments it will take another 18 years to pay off, and unless I plan on retiring within those 18 years, I have very little interesting paying it off within 5 years recommended.
Yes, many who graduated about the same time as me have student loans at 1-2%. Obviously, those people aren’t refinancing that debt and it isn’t entirely unreasonable to drag that out for decades. What was unreasonable was to loan someone money at 1%!
There is a possible rationale for 20 year fixed loans: PAYE forgiveness is taxable. That tax bill could be a large sum.
If the 20 year refinance saves more than (100% – marginal tax rate at forgiveness time) * the forgiven amount then refinancing will have been a better deal, at least ignoring the benefits of potentially much lower PAYE payments along the way and potential investments with those monthly savings.
Good point. You’d have to run the numbers. I just can’t imagine having student loans for 20 years though.
My own finances don’t involve any 20 year student loan terms, on the other hand. PSLF for me, SoFi variable 10 year term for the non-physician wife’s student loans (with me as a co-signer and plenty of life insurance so I’m not taking on untoward risk).
Pre-tax retirement funds come out from the paycheck automatically at a >20% proportion of my gross earnings, carefully minimized bills then get paid in full, and then the remainder goes toward taxable investments. I’m ok with hanging on to debt for 10 years when it’s at 3% and less (effectively, for the future mortgage), as long as I continue to keep spending in check such that the extra money is indeed invested.
This wouldnt be bad for me. I already have a 5 year (slightly less) plan for my debt (450+)and their rate is lower than some of my already variable private loans are. Ill look into it, thanks!
This seems like a good option for us as well. My husband finished residency in July, and we were approved for a 5 year fixed with at 4.74% ($306,000 starting load amount) that went through in October. We are basically living on my salary now, and putting his towards maxing out his retirement, taxes, and student loan repayment. We should have it paid off in 2.5 years. We could look into this option. The trick is, with this high of a loan burden we aren’t always eligible for the low interest rates.
The other issue – now that we have the increased income, it is tempting to want to save it for a down payment on a house, which in this area of the country would take two years of aggressive saving. So, pay the minimum on the student loans now, have a down payment to buy a house in two years, and still owe on the student loans; or pay the loans off aggressively then save for a down payment to buy in about four years? We think more now about the tax benefits of owning a home, since we are no longer eligible for student loan interest deductions or any other deductions. I think for now we’ll pay off the loans and learn about the home buying process. Kids may change where we want to buy in the future, and it does seem exciting to get rid of this mountain of student loan debt as fast as we can!
Many docs with massive student loan burdens find using a doctor loan for the mortgage works out well for them. Is it ideal? No, but in a low interest rate and rising home value environment like we’ve been in the last 4 years, you probably come out ahead buying sooner rather than later. That doesn’t mean that environment will persist, but the right decision for someone in your situation over the last 4 years was probably to buy the house with a 0% down doctor loan and use the extra cash to pay off the student loans.
Thanks for the comment! I’ll look into that as we learn about buying a home.
It’s definitely great to look at all the options that are available to refinance the student loans. They are a huge burden and definitely one of those things that is looming for many of us every month. I, unfortunately for financial reasons, but good for life reasons, am in San Francisco. An area that Dr. Dahle describes in the WCI book as a kind of a no-mans-land for physicians hoping to quickly increase net worth and pay off debt. Living like a resident is almost impossible as there are no apartments to rent for less than $3500 a month and no houses to buy for less than 1million. That being said, because there is significant competition out here physicians also bring home less income than the national average. Those all equate to an unfavorable financial situation for physicians.
With my student loans I started at $213K that I owed (I went to a state school). I ended up refinancing 50k I had at 6.8% with SoFi now at a fixed 5 yr for 3.99%. I still have 41K at 2.08% for 10 years and 107K at 4.5% for 30 years. To pay them all off over 5 years would cost about $3700 a month, which would be doable if I wasn’t in San Francisco. I just have to realize, that the life choices just make the road out of indentured servitude a little longer and I’m confident I can do it in less than 10 years.
My one recommendation is to look at the loan benefits you have with your original student loan provider. First see if they will compete at all with the refinance companies before you switch (mine wouldn’t which was why I switched the high interest loans to SoFi). The 107K that I have (consolidated while I was in med school to prevent it from jumping to 7%) will drop automatically from 4.5% to 3.5% after 36 on time payments. It was a random benefit that years ago I didn’t pay attention to, but now I can’t wait to get to the three year mark as more of my money will go towards principal instead of interest. A lot of other loan benefits you may have include reduction of principal, interest rate benefits for automatic payments, reductions for enrolling in electronic communication, etc. These are all easy things to do that can save you money!
I also just wanted to thank Dr. Dahle for his work on this blog and on the book. It has really opened my eyes and made me feel way more knowledgeable about finances and appropriate financial goals. I see my father who should be retired still working since he made some poor decisions – he didn’t follow the one house/one spouse rule and also did not save enough. I have already started putting money away for retirement, albeit not as much as I would like. But I am confident that I will be able to be financially free at a reasonable age. Just a little bit later than some colleagues living in friendlier economic climates.
Now if I just invented a tech device out here……
Variable rate FTW, or just fixed. Especially looking at Common Bond’s options… the hybrid seems to offer very little upside, plus all of the downside of a variable rate loan at the end of the initial term (and if you still need a lot of time to pay after the first 5 years, then a rate hike would be killer). But hey, I appreciate that Common Bond is giving the lenders more competition and the consumer more options.
Personally, I went variable rate with Darien Rowayton when refinancing my resident wife’s loans. Right now, and for the next three years, she’s still be a resident making peanuts but together we qualified for the refi, and at ~3.5% the savings vs. the Sallie Mae 6.8% is tremendous (on ~$175k of loans).
Theoretically the rate could explode at any moment, but DRB offers a 9% cap unless you finance to 20 years. Every month that passes at our low rate is literally money in the bank as it allows a substantially larger portion of principal to be paid down with every payment, along with the payment itself being smaller than before.
It’s a bull market but it takes a dip every time the fed ponders the possibility of considering a rate increase, and across the pond the EU recovery is still looking pretty terrible, so it doesn’t look like there’s much to worry about. But even if we had Jimmy Carter rates again, the max 9% is only 2.2% worse than what we paid before, and only about $600/mo worse (don’t get me wrong, I’d be upset, but it wouldn’t affect our lifestyle). Plus by the time that happens my wife should be out of residency and this note should be paid off.
WCI-first, thanks for all you do. Terrific site. This ARM for student loans intrigues me. I am finish my subspecialty fellowship in 7 months and will be starting practice at a nice base salary. I currently have 200,000 in student loans but will have 175,000 by the time I start practice (thanks to a signing bonus and my current monthly allocation to the loans). I plan to refinance that amount and was planning to do so with DRB, but this option with Common Bond intrigues me. My wife and I have a monthly mortgage of $850 that will not change, two cars completely paid off and no credit card/consumer debt, so our current plan is to have that ~175,000 paid off in no more than 2 yrs. The caveat to all of this is we are expecting our first child in June, so there will be many added expenses we currently do not budget for at about the same time our income drastically increases (meaning I will be in number crunching overload).
So my question is this, would this 5 yr ARM be a good option for us, in order to possibly get a lower interested rate? We still plan to have the loans paid off in 2 yrs, but the 5 years would give me a cushion in case we have unforeseen needs with a new baby and I certainly don’t plan to have them around past 5 yrs, so the possibility of the rate increasing wouldn’t apply to us. What do you think? Thanks for your reply and your time.
Why not just do variable? The risk seems very low in your situation. But if you’re not comfortable with it, then sure, fix it for 5 years.
I guess it’s me playing the “what ifs” or unknowns. What if my 13 year old honda dies and we have to buy another car (we would pay cash)? What if there are health issues/medical bills with a new family member? If we can get a low rate should we could put some of that money into investments (taxable accounts, already plan to max out all tax advantaged accounts as you suggest) as opposed to solely paying off loans? If those things happened it could take us 3-4 yrs to pay off loans instead of the 1-2 we plan. I know the what ifs will always exist and maybe I need just need to allow myself to tolerate some risk with a variable, but it the common bond hybrid seems like an option.
I refianced 190000 with sofi for 3.3% at the variable rate. Jan 1st 2015 the interest has gone up to 3.4% so it took a whole year to move. Mind you i at 50k now.Am so happy
This is a great site and these are also great comments to read. We are in a somewhat similar yet different situation. I, too, am finishing fellowship this year and starting my first real job in July. Base salary ~200,000 in a moderate cost city where rent will be around 1300-1700 for the size I need for my family. Housing for a good school district will be around 400,000 – 700,000 if we chose to buy. We have no consumer debt and a decent emergency fund that we do not touch. We have ~370,000 student debt with a weighted average 6.2%. My wife does not work right now because of daycare costs while the kids are so young. Once older, she can afford to work again but daycare costs for children < 2 yo is ridiculous.
I am intrigued by the comment people are paying their loans off in 2 years as well as WCI saying they should be paid off <5 years. I have calculated I will be bringing home just over 10,000 per month. Say we live on 50,000 and have 70,000 then leftover to dump into student loans. How can this be done in 5 years with compounding interest? I don't see these companies approving my situation. This means we are living "like a resident" for many years to come. If you think they would, any recommendations on how to approach this?
To throw another wrench, we would like to buy a house in a year or so, but cannot fathom adding the mortgage to our monthly bills.
I bring this up because it seems more of my colleagues are in high student loan situations as we are entering the work force. So, any advice on how you recommend tackling this high interest student loan debt, possibly buying a house, and trying to move on without so many bills would be great. I have read many of your articles since residency and have been learning a lot. Part of me feels our medical school and residency program financial offices have failed to inform and prepare many of us on how to manage finances.
Thank you for your time and advice.
Take this comment in the spirit in which it is intended, which is only to help you.
You need to understand that you are in a terrible financial situation. You have an average physician salary, and almost twice the average student loan (which is ridiculous to start with), and live in a relatively high cost of living area. That is why it seems so difficult to do what most docs ought to do (i.e. get out of debt by living like a resident for 2-5 years.) So, in order for you to make this work, something has to give. Here are some possibilities:
1) The student loans have to give- i.e. you take a job that qualifies for PSLF.
2) The job has to give- you need to figure out a way to earn more- work harder, move to another job that pays more etc.
3) The lifestyle has to give- Maybe living like a resident isn’t good enough. There are people out there living on $30-40K. Maybe that’s what you’ll have to do for a while.
4) Maybe the house has to give. Perhaps you can’t get into your dream house inside of five years.
5) Maybe the taxes have to give. It’s bizarre to me that you are paying 40% of your income in taxes on a mere $200K with 3 dependents when I’m paying slightly more than half that on a multiple of your income. I suspect you’re just wrong about what you pay, but if not, consider moving to a lower tax cost area or learning more about how to lower your tax bill.
Here’s what I would do if I were you. First, I would convince myself I was very poor. Which wouldn’t be hard because I would be with a negative net worth of $370K. Second, I would see if PSLF were an option or if I were willing to change jobs to make it an option. Third, I would live on $50K a year. I would be paying probably something like $30-40K in taxes. That leaves $110K a year with which to build wealth. The lion’s share of that would go toward the student loans, let’s say $90K (and refinance them). Maybe $10K toward retirement (two Roth IRAs or some money into a 401(k) if you want to lower your tax bill.) Then I’d use the remaining $10K to boost the emergency fund/start saving up a down payment. In 5 years, I’d be student loan free, have perhaps $70K toward retirement, and have enough of a down payment to get into a home with a doctor loan. Depressing? Sure. But it represents an increase in net worth of over half a million dollars in just five years on a salary of just $200K. Not too shabby at all. If you concentrate on the increased net worth each year instead of the fact that you’re a doctor renting a 1500 square foot townhome whose paychecks are mostly just transferred to Sallie Mae it will be slightly less depressing. Also consider the alternative to not following this prescription. Imagine yourself in 5 years, still making $200K, still owing $300K on your student loans, living in a $700K house on which you owe $680K, and have $20K put away toward retirement. Instead of having a net worth of $120K, you would still have a net worth of -$260K…after making a million dollars in total salary.
Thank you very much for the note. I do take your advice in the spirit for which it was intended, to help me and other sorry fools with high debt.
To clarify, I made a typo. I have 330,000 student loans. According to the statement, 292,000 principal and 38,000 outstanding interest. My apologies.
200,000 is my starting salary, this will be bonused after 1 year based on wRVUs. (from historical data I should make 210 next year and probably 215 the following year). I am in a sub-sub specialty and want to practice in academia. I feel there is a mission in educating residents how to operate and am willing to make that financial sacrifice. I am also in a prestigious department for my specialty and could not pass up the opportunity, despite it’s lower pay. The bonus of this is that my workplace will fund my children’s college education 100%. They also provide 7% of my annual base salary after 2 years employment and 10% after 10 years to a 403(b). My wife has worked in the past and has 70,000 already in retirement savings and I have whatever I built from residency and fellowship. We also have about a 6 month emergency fund that is enough to cover our expenses during that time.
My wife is considering working as she can make around 50,000 pretax dollars per year. This would be a huge help. If she is willing, we can mostly live off her salary and use mine as you described and allow us to put that extra money toward the loans.
Two comments/questions:
1. I based the monthly income on an online “take home salary calculator.” I have never made this much, nor has anyone in my family as my parents make a total of around 50,000. I do not have mortgage interest to deduct. I tried to itemize this year as I had 4,000 toward my board exam, traveling for multiple interviews etc, etc, and didn’t even come close to the standard deduction (given the 2% floor of my itemizations). So, I am very much a novice when it comes to taxes. I would be interested to talk to you about how you pay less in taxes and what I could expect to realistically pay.
2. Can you guide me toward a trustworthy way of refinancing some or all of the loans based on my situation and goals?
First of all, that’s awesome news. $40K in debt just disappeared!
Second, the raises are awesome too! Much of my wealth has come from making more money than I expected to make.
Third, count that college education as part of your salary-that’s a very valuable benefit. So is the match. I’ve never had either of those benefits but would love them. Make sure you get your whole match.
Fourth-great news on your wife’s retirement and the emergency fund too. Sounds to me like you’re in much better shape than I initially assumed.
1) This post may help with the taxes: https://www.whitecoatinvestor.com/10-reasons-why-i-pay-less-tax-than-mitt-romney/
2) If you’re working as an academic and trained to do a sub-sub specialty, why aren’t you going for PSLF? Seems like a no-brainer. Have you been enrolled in the IBR or PAYE program during training? (Please say yes or I’ll cry with you.) If your employer is a 501(c)3, forgiveness is likely a better choice than refinancing. Remember you can’t do both.
Grab a Kleenex. No IBR for me. I graduated right when it started so I didn’t know much about it (I actually hear a lot of people my age say similar from other programs). My medical school did not council us on this at all. By the time I got wind from my more junior residents, our financial office didn’t recommend it. I unfortunately got no advice early on and possibly bad advice later on.
I, like many of my residency colleagues that I have talked to and are willing to share finances, are in similar circumstances. The only difference is that most of them are going into private practice making more money, a lot more money.
So, this is the reality I live in and I am trying to maximize this bad situation. I appreciate your guidance along the way. I am sure I will have comments and questions later about when and how much and where to start saving for retirement!
That sucks. I’m sorry to hear that. You’ll have to run the numbers to see if it makes sense to enroll now and drag those loans out 10 more years (there probably won’t be anything left to forgive) or to refinance and pay them off. But you ought to do one or the other.