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:
|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%|
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!